Over at Bogleheads we came across the following discussion: 401k and HCE Status by BanditKing
I noticed a ~$3000 dip in my 401k last night and apparently it turns out I hit some "Highly Compensated Employee" threshold and Fidelity did a withdrawl and mailed me a check.
I'm having a little bit of a hard time understanding what this means. I didn't exceed my $17,500 contribution for last year and I couldn't find a lot I understood googling around except a reference to "$115,000" as a 2013 limit (and 2014 having that same limit). If it matters, in 2013 I made about $140k and in 2012 about $150k (but wasn't contributing as much to my 401k that year, only the minimum to get full match).
Question 1: How do I make sure to maximize my contribution in 2014? So I need to base my witholding on a presumed income of $115k and ignore anything in excess?
Question 2: Presumably this refund I got issued is considered taxable income, so do I have to claim it on my 2013 taxes and file an amended return? Or can I take care of it as 2014 income and worry about it next tax season.
I haven't contacted my HR with any questions, because I'm not 100% sure what to ask, but if need be I can. Their knowledge/responses to 401k questions have been somewhat lacking when I've talked to them in the past.
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Re: 401k and HCE Status
by livesoft » Tue Mar 11, 2014 6:24 pm
This is really no problem. You will not have to amend your past tax returns. A similar thread helps explain some of your questions. The thread is
viewtopic.php?f=10&t=134782&p=1991952 and the last post was just a few hours ago. There are many such threads like it on the forum. I suppose there will be many more as this is the time in March when the audit results from the plans are complete and lots of folks are getting "cash back" from their 401(k) plans.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: 401k and HCE Status
by mah001 » Tue Mar 11, 2014 6:52 pm
2--Sounds like the $3,000 is taxable in 2013. Earnings, if any, are taxable in 2014 and subject to 10 percent early distrib penalty unless there's an exception. 1099 for the 3000 will contain a code indicating 'taxable in 2013.'. Separate 1099 issued for the earnings. This assumes the 'plan year' ends 12/31/13. Sounds like the plan failed the ADP test and is distributing the excess contribution ($3,000) within 21/2 months, thereby avoiding filing F. 5330 with payment of 10 per cent excise tax. I failed to mention this in the other thread, pending passage of 3/15 and additional facts, i.e. did you get the money within a day or two of 3/15?
1--Calculate net percent of pay you deferred in 2013, after accounting for the 3,000 returned, and assume this year's allowable percentage will be in proximity----------unless the plan has changed its methodology or is otherwise able to provide you a more precise number to aim for.
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Re: 401k and HCE Status
by livesoft » Tue Mar 11, 2014 6:54 pm
The previous reply by mah001 very likely has incorrect information, so don't believe it without verification from other sources.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: 401k and HCE Status
by mah001 » Tue Mar 11, 2014 7:39 pm
Sorry about that. Maybe the taxability issue is something that changed after 2008. See I.R. Reg 1.401(k)-2. I guess one must research everything about pensions before speaking. I do still stick with my response to OP Question no, 1.
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Re: 401k and HCE Status
by BanditKing » Tue Mar 11, 2014 9:18 pm
Thanks all. I think I've got a better handle on this after responses here, in the other thread, and some more research. Just was kind of a shocker as I had no idea it could happen after I shuffled around so much to max my 401k last season and had no idea this kind of thing even happened. Plus it makes me wonder about our 401k plan in general, but that's another analysis for another day.
I'll take this refund and dump it 100% into municipals in my taxable account, which I'm underallocated on right now anyways (yes I know I have to pay taxes on it eventually).
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Re: 401k and HCE Status
by livesoft » Tue Mar 11, 2014 9:22 pm
When this happened to me, I just considered it deferred compensation somewhat like getting last year's bonus paid in this year. Sure it sucks to pay taxes when you didn't expect it, but at least you paid no penalty. I would just max out contributions for 2014 as well and get the check next year if it happens again.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
Posts: 30209
Joined: 1 Mar 2007
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Re: 401k and HCE Status
by BanditKing » Tue Mar 11, 2014 9:23 pm
Yup, that is my plan. Max it and then get the refund differential next march.
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