401k Contribution Limits 2022 Highly Compensated Employees
For those earning higher salaries, the IRS imposes special rules regarding contributions to a 401k retirement plan. Highly Compensated Employees (HCEs) are subject to different 401k contribution limits than other employees. The 2022 401k contribution limits for Highly Compensated Employees are $19,500, with an additional catch-up contribution of $6,500 for those aged 50 or older.
Requirements to be Classified as an HCE
The IRS designates individuals as Highly Compensated Employees if they meet one of two criteria. The first criterion is that the employee must be one of the five highest earners in the company during the current or preceding year. The second criterion is that they must have earned more than $130,000 in the current or the preceding year. This amount is adjusted annually by the IRS and is currently set at $130,000.
401k Contribution Limits for Highly Compensated Employees
For 2022, Highly Compensated Employees are limited to contributing $19,500 to their 401k plan. This is the same as the contribution limit for all other employees. However, HCEs are also eligible for a “catch-up contribution” of $6,500 if they are age 50 or over. This catch-up contribution is in addition to the $19,500 limit.
Employer Matching Contributions
In addition to the contribution limits, the IRS imposes restrictions on employer matching contributions for Highly Compensated Employees. The employer can only match contributions up to a certain amount for HCEs, which is set at the lesser of 100% of the employee’s contribution or $5,500. This amount is also adjusted annually and is currently set at $5,500.
Deferral Percentage Tests
The IRS also imposes deferral percentage tests on Highly Compensated Employees in order to ensure that they receive no more than the average contribution rate of non-highly compensated employees. These tests are designed to ensure that the contributions of the HCEs are not disproportionately higher than those of other employees. The tests compare the contributions of HCEs to those of non-highly compensated employees, and if the HCEs contribute more than the average, the employer is required to reduce the amount of their contributions.
Contribution Deadline
The deadline for 401k contributions for Highly Compensated Employees is the same as for all other employees. Contributions must be made by the end of the calendar year in order to be counted towards the current year’s limit. This deadline also applies to employer matching contributions.
Consequences of Exceeding Contribution Limits
If an employee exceeds the contribution limit for the year, they will be subject to a 6% excise tax on the amount that exceeds the limit. In addition, the employee will be required to withdraw the excess contribution, plus any associated earnings, by the tax filing deadline for that year. If the excess contributions are not withdrawn, the employee will be subject to income taxes on the excess amount, as well as an additional 10% early withdrawal penalty.
Advantages of Contributing to a 401k
Contributing to a 401k plan can offer numerous advantages. Not only can it provide a tax-advantaged way to save for retirement, but it can also help to reduce taxable income in the current year. Additionally, employer matching contributions can provide an additional benefit, as the employer’s contributions are not subject to income taxes. Finally, by contributing to a 401k, individuals can take advantage of the power of compounding, which can help to maximize their retirement savings.
Conclusion
Highly Compensated Employees are subject to different 401k contribution limits than other employees. For 2022, the contribution limit for HCEs is $19,500, with an additional catch-up contribution of $6,500 for those aged 50 or older. Employer matching contributions are also limited for HCEs, and the IRS imposes deferral percentage tests to ensure that the contributions of HCEs are not disproportionately higher than those of other employees. Contributing to a 401k can offer numerous advantages, and by doing so, individuals can take advantage of the power of compounding to maximize their retirement savings.