Saving for Retirement 101: 401(k)s & highly compensated employees

 In Elder Law, Estate Planning, Tax Law

401(k) Contribution Limits for “Highly Compensated Employees.”

If you are a highly compensated employee (“HCE”), you may be subject to certain limitations on the funds you may contribute to your 401(k).

Annually, an HCE may not contribute greater than 2% of their salary to their 401(k) than the average non-HCE contribution. For example, if the average non-HCE employee contributes 4% of their salary to their 401(k), the HCE employee may contribute at most 6% of their salary to their 401(k). Beyond this federally mandated limitation, your employer may have specific caps within your company.

How do you know if you are an HCE?

The IRS considers an individual an HCE if:

EITHER: you owned 5% or greater of a company in the previous year and are taking part in that company’s 401(k) plan, OR: during the previous year, you earned $130,000 or greater with a 401(k) plan in which you actively participate.

Note: if you are a highly compensated employee (“HCE”) whose employer has set up a safe harbor 401(k) plan, these limits may not apply to you.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

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