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Who’s Watching You! Identifying Highly Compensated Employees in 401(k) Plan Testing

October 03, 2023 (3 min read)

Unless your employer 401(k) plan wholly follows the safe harbor route, you’ll need to determine who among your employees should be treated as a “highly compensated employee” (HCE). Determining this is one of the most critical steps in maintaining 401(k) plan compliance. The nondiscrimination tests that apply to 401(k) plans rely on a correct HCE determination and mistakes made in HCE status can have adverse consequences, potentially jeopardizing the plan’s tax qualified status.

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Related Content

  • 401(k) Plans: Understanding the Rules
    See how, absent safe harbor status, nondiscrimination requirements apply to 401(k) plans to limit employee contributions, so they don’t discriminate in favor of HCEs. This reflects a broader policy that tax-advantaged retirement plans should not skew their benefit or contribution formulas in favor of HCEs. 
  • Safe Harbor 401(k) Plan Resource Kit
    Reference this safe harbor 401(k) plan resource kit to see what we’ve assembled on the topic. Safe harbor plan designs allow plan sponsors to bypass certain nondiscrimination testing requirements that apply to qualified plans that have a cash or deferred arrangement (e.g., 401(k) and 403(b) plans), and that may provide for matching contributions.

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