Helping Limited Highly Compensated Employees

One of the perils of making “too much” money, or rather, hitting the IRS’s ceiling for the 401(a)(17)/404(l) compensation limit, is that you likely won’t be able to put enough money in your company’s retirement plan to fully fund your retirement.  (In other words, if you make more than $250,000, this generally applies to you.)  Discrimination testing in 401k plans often leads to the highly compensated employees being limited to how much they can contribute, so in addition to already being mathematically unable to save enough even if they max out (2013 max is $17,500 or $22,500 if you’re 50+), now they’re even more behind.  What to do?

This is where it’s really important to revisit the design of your company’s retirement plan or package with a knowledgeable consultant.  In some cases it’s as easy as making the plan a safe harbor plan to allow HCEs to put away more.  Adding a Roth contribution option to the 401(k) can help those in high tax brackets get the opportunity for some tax-free retirement money.  Installing tandem plans, such as a non-qualified deferred compensation plan, a defined benefit plan, or a cash balance plan, can be helpful.  (In the non-qualified arena, it’s permissible to discriminate and offer the plan to only certain employees.)  These plans all have different tax implications for both the business and the employee, so it’s important to factor that in as well as cash flow of the business.

[As a side note: besides a retirement plan consultant, a financial advisor, tax advisor, and ERISA attorney will come in handy here as well.  Company-sponsored retirement plans are great but they’re built for the masses as a basic foundation and do have limitations. We retirement plan consultants can only do so much!]