Such plans require annual testing to ensure that a 401(k) does not discriminate in favor of highly compensated employees
, including owner-employees.
The total annual compensation requirement for highly compensated employees
to be exempt from overtime pay will increase to $134,004 per year, up from $100,000 per year.
In a discriminatory plan, highly compensated employees
are taxed on the increase in the pension value each year [IRC section 402(b)(4)(A)], Non-highly compensated employees
must include in their gross income the vested employer contributions to the plan; the income recognized is added to the employee's basis [IRC section 402(b)(1)].
In addition to finalizing the salary threshold for overtime exemptions, the final rule increases the total annual compensation requirement in order to exempt highly compensated employees
(HCEs) from the overtime regulations.
Summary paragraph: Helping highly compensated employees
maximize their retirement saving
It means that the plan has highly compensated employees
who were unable to save as much for their retirements with pretax income as they would like.
Among the requirements that a defined contribution plan, including a 401(k) plan, must meet is that the plan does not substantially favor highly compensated employees
For example, there are limits on the contributions employers and highly compensated employees
can make to a 401 (k) plan.
401(k) plans must meet certain nondiscrimination rules that require non-highly compensated employees
to participate in the plans at certain levels compared with the participation of highly compensated employees
(called the actual deferral percentage (ADP) test).
Who are highly compensated employees
for purposes of the qualification requirements?
Group long-term disability plans are prompting many employers to look for ways to offer adequate income replacement to highly compensated employees
without increasing their exposure to risk and pricing volatility.
Sufficient income protection for highly compensated employees
facing indefinite disability is sorely lacking.