Its the retroactive application that is annoying.
Many 401K plans have percentage or absolute
limits below the maximum allowed by law, but
are upfront about it.

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<spoca2005[at]yahoo.com> wrote:

- quote -

Suppose that all the low-compensated employees don't
participate, and all the highly compensated employees
contribute the maximum. Then all of the matching goes to
the highly compensated employees, which is the
discrimination they're trying to avoid. The formula doesn't
discriminate (that would itself be prohibited), but the
result does.

Seth

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

<spoca2005[at]yahoo.com> wrote:

- quote -

<snip
- quote -

Just income tax. The other taxes have already been applied
to the income, and there is no penalty.

- quote -

It's 2005 income, the year of distribution. See page 9 of
Pub 525.

- quote -

I think you're overreacting. You wind up with exactly the
same taxable income you would have had if the excess had
never been deducted, and you have more than enough cash
(from the distribution) to pay the unexepected additional
tax.

- quote -

Encourage non HCE's to contribute.

--
Phil Marti
Clarksburg, MD

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

In calendar year 2004, I contributed $13,000 (max allowed by
IRS) to my employer-sponsored 401(k). The company match was
a modest 30% of the first 10% (i.e., 3% of the pay).

Now, nearly 13 months after the plan year 2004 was over, I
received a notice that I am categorized as a highly
compensated employee (HCE). A number of other people at the
company also received this notice. Our 401(k) has been in
existence for over 10 years and this is the first time it
has happened. HR told us that the company had never failed
the determination test before.

1. Is it common for plan administrators to take 13 months to
do this test? Why couldn't they have done this test in
January 2005? All the data must have been available as of
12/31/2004.

2. How will the "excess" be taxed? Would I owe taxes +
penalties + state taxes + FICA + SDI ?

3. Is it an income for year 2004, the year of excess
contribution? Or is it income for 2006 (when I received the
notice and the check)? Or is it income for 2005 (the date of
check is Dec 27, 2005). Oddly enough, the check does not
have normal date; it only says "Do not cash before:
12/27/2005" and "Invalid After 270 days".

4. For year 2005, I contributed $14,000 to 401(k). Is there
something I can do now to minimize the hit from HCE? Or how
can I contain the snow-ball effects, minimize taxes and
penalties?

5. I had planned to contributed $15,000 for year 2006
(current year). What planning can I do for 2006 to minimize
HCE impact?

What can the company do to avoid this kind of problem in
future? I would like to lobby our HR VP, so I would
appreciate exact details of how the test is carried out, and
what are the legal ways to avoid this problem.

I know that taxes don't have to make sense, but how is
limiting me to contribute to my own retirement savings a
good policy for government? My employer matches in the same
manner to everyone (max 3% of pay). Ostensibly, the HCE test
is to avoiod discriminatory funding by companies, but in my
employer's match formula, there is no discrimination at all!

Thanks.

SPOCA2005

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >