Home  >  Financial Articles and Q&A  >  Safe Harbor 401k and Highly Compensated Employees?

Safe Harbor 401k and Highly Compensated Employees?

I started a new job with a salary of $65,000. The company 401k application says this is a Safe Harbor Plan, that I am a Highly Compensated Employee, that I am not eligible for the company match, that as an HCE I can self-match. I have done some reading about Safe Harbor 401k and Highly Compensated Employees. None of what I have read matches the information I am getting from the company. Is the company information correct ?

Jan 02, 2015 by Jim from La Grange, IL in  |  Flag
7 Answers  |  9 Followers
Follow Question
6 votes
Peter C. Karp Level 20


As all of the other advisors have stated, a highly compensated employee (HCE) as defined by the IRS is an individual who: 1) Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or 2) For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2013 or 2014; $120,000 if the preceding year is 2015), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation

You should request a copy of your company’s summary plan description from the HR department. The plan document is the driving force and includes eligibility, exclusions, terms of marching contributions, etc. As one of the other advisors mentioned, you may have been provided with the incorrect application.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Infinity Securities (a registered broker-dealer, member FINRA, SIPC). Infinity Securities and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Jan 09, 2015 from San Francisco, CA

1|600 characters needed characters left
1 vote

Hi Jim,

Sounds like you may have been given incorrect information....

A Highly Compensated Employee (HCE) is one who either (a) owned 5% or more of the company during the year or preceding year, or (b) received $115,000+ in compensation from the business for the preceding year (becomes $120,000 when preceding year is 2015). So based on what you indicated, unless you own/owned 5% of the company, you're not an HCE.

As you probably know from your research, a "safe harbor" match of participant contributions is usually implemented specifically so the more highly-compensated participants can defer the maximum without worrying that the plan will fail annual testing.

There may be some additional details or context not included in your comments, so I'd encourage you to talk with HR to clear things up.

Hope that helps. All the best!


Comment   |  Flag   |  Jan 02, 2015 from Clackamas, OR

1|600 characters needed characters left
0 votes

You said the "application says...that you are a highly compensated employee".

It is possible that you were given an application intended for the company's HCE's. Or possibly you are just misinterpreting what the application says. But as Larry said, unless you meet those parameters, you should not be considered a HCE.

Comment   |  Flag   |  Jan 05, 2015 from Mystic, CT

1|600 characters needed characters left
0 votes

Jim, Congrats on the new job.

I would use this as a bargaining tool to try and get a raise that would make you a HCE. All joking aside unless you own 5% of the company you would not be a HCE at the $65,000 level. I would contact HR and find out why they gave you that application.

Best of luck,

Tim Hudson

Comment   |  Flag   |  Jan 05, 2015 from Summerville, SC

1|600 characters needed characters left
0 votes

All correct answers plus if the plan is a "Safe Harbor" plan you will receive either a flat 3% of W2 income employer contribution or a 4% match assuming you contribute at least 5%.

Comment   |  Flag   |  Jan 05, 2015 from Mission Viejo, CA

1|600 characters needed characters left
0 votes

I concur with the comments that you should not be a HCE unless you are also 5% owner as well. Talking to your HR department should clear this up, but they can always contact their administration firm for a better understanding of their plan design.

One question that might be worth asking the HR Department too, is why the plan is both Safe Harbor, and excluding HCEs. The typical purpose of a Safe Harbor plan would be to allow for HCEs to participate in the plan without worrying about annual tests the plan would fail if the plan was not Safe Harbor. While there could be a few reasons, I would not consider it a common practice except for in a few particular designs and goals.

Comment   |  Flag   |  Jan 05, 2015 from Columbus, OH

1|600 characters needed characters left
0 votes

Jim, one must remember that not everyone in the HR department is as knowledgeable as they should be. That being said, I too believe you received the wrong packet and if not, I'd love to know who the advisor and sponsor are of this plan as they don't know what they are doing. I'm in Roselle if you need any more help with this situation, or if your HR department may need a review. Good luck with the new job and Happy New Year!

Comment   |  Flag   |  Jan 06, 2015 from Bloomingdale, IL

1|600 characters needed characters left