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I just received a notice from my employer that based on my 2021 income, I’m considered a highly compensated employee for 2022 and not eligible to participate in the company’s 401(k) program for 2022 (technically they’ve set a limit of a 1-time $10 contribution for the year). The only option provided is a nonqualified savings plan, which is not a retirement plan at all and pays out as a lump sum on leaving the company, and as I understand it is a company asset (even though contributions would be deducted from my pay) and has no protections.

Highly compensated staff employees (2021 earnings over $135,000) may only participate in the 401(k) plan on a very limited basis. Generally, you will be limited to a one-time $10.00 (ten dollars) 401(k) contribution unless you will turn age 50 or above next year.

Is this legal? Can they limit employee participation in the 401(k) plan based on income in this way? I’m guessing this is being done so that the “average” contribution amount for HCE’s can work out in favor of the executives?

Chris W. Rea
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1 Answers1

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It is not only legal, but limiting the contributions of HCEs is a requirement of the law: https://www.fool.com/retirement/plans/401k/highly-compensated-employee/

In short, they didn't want this to become a plan just for the top/richest employees to be able to tax defer their income. Therefore, there must be enough of the non-HCEs participating in the plan for the HCEs to also participate. Most companies entice the non-HCEs into participation via generous matching contributions.

Exactly the details of how they pick who and what HCEs can participate if there is a partial ban would be up to your specific company, but your best bet to try to 'fix' this would be to encourage your company/HR to up the enticements so that more of the non-HCEs participate to a level that removes the HCE restrictions.

R. Hamilton
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