A 401(k) plan is one of the most popular benefits offered by a firm to its employees. Unfortunately, due to government regulations and hard-dollar contribution limits imposed, instances frequently develop where a firm’s highly compensated employees (HCEs) and key employees (Keys) are severely limited in their relative benefit from a qualified 401(k) plan.
The current 2011 definition states that an HCE is defined as any employee with compensation in excess of $110,000, and the group broadens even further with the definition of a key employee.
Employers in industries with high turnover, a high percentage of hourly workers, or relatively low wages may find that a 401(k) plan may not meet the needs of its higher-paid and longer-term employees. Low participation rates of hourly and transitional employees in some cases dictate that HCEs and Keys can only contribute 40 to 50 percent of the maximum allowable flat-dollar amount of $16,500. This leaves a serious “retirement gap” that HCEs and Keys have to account for.
Section 1-410(b) of the Treasury Regulations addresses minimum coverage and nondiscrimination rules for qualified plans. A common misconception is that when a 401(k) plan is established, it has to cover all employees at the sponsoring firm to meet the coverage standards and test imposed on qualified plans; however, this is not necessarily the case. The issue can be addressed by partnering with a qualified and nonqualified retirement plan consultant who understands the nuances of the code and how to optimize employer contributions and employee classifications. This will allow the firm to do what it is supposed to do: deploy capital efficiently to maximize shareholder value.
Here is how it works. If no HCEs are covered under the