401k Contribution Limits 2022 For Highly Compensated Employees
The 401(k) plan is a retirement plan for U.S. businesses that allows employees to make contributions from their pre-tax income. This is a great way for employers to provide their employees with a retirement savings option and for employees to save for their future. However, there are limits on how much employers and employees can contribute each year. For 2022, there are specific limits for highly compensated employees (HCEs) that should be taken into consideration.
What Are Highly Compensated Employees?
A highly compensated employee is an employee who either owns more than 5% of the company or earned more than a certain amount during the preceding year. The amount is determined by the IRS and is adjusted each year. In 2022, the amount is $130,000, meaning any employee who earned more than that amount in 2021 is considered an HCE.
What Are the Limit Rules for HCEs?
The limit rules for HCEs are slightly different from those for other employees. The maximum contribution limit for HCEs in 2022 is $58,000, which is higher than the limit for other employees ($19,500). In addition, HCEs must be tested each year to ensure that their contributions are within the limits set by the IRS. If an HCE exceeds the contribution limit, they may be subject to a penalty.
What Are the Requirements for Testing?
To ensure that HCEs are within their contribution limits, employers must perform two tests annually. The first test is the Actual Deferral Percentage (ADP) test, which compares the average contribution rate of HCEs to that of non-HCEs. If the average contribution rate of HCEs is more than 2% higher than that of non-HCEs, the plan fails the ADP test. The second test is the Actual Contribution Percentage (ACP) test, which compares the average employer matching contributions of HCEs to that of non-HCEs. If the employer contributions of HCEs are 2% higher than that of non-HCEs, the plan fails the ACP test.
What Happens if the Tests Fail?
If either of the tests fail, employers must take corrective action to ensure that the plan is compliant. The corrective action may include returning excess contributions to the HCEs and/or adjusting future contributions. Employers should consult a qualified professional to determine the best course of action.
Conclusion
The 401(k) plan is a great way for employers to provide their employees with a retirement savings option. However, there are limits on how much employers and employees can contribute each year. In 2022, the limit for highly compensated employees is $58,000. Employers must also perform two tests annually to ensure that HCEs are within their limits. If either of the tests fails, employers must take corrective action to ensure that the plan is compliant.