when a company contributes to a defined benefit or defined contribution plan for its employees and those contributions are based on the employee s compensation the irs requires that the company minimize the discrepancy between the retirement benefits received by highly compensated and lower compensated employees 6
if an employer fails to correct a discrepancy the plan is liable to lose its tax qualified status all contributions would have to be returned to the plan s participants the employer could also face severe financial and tax consequences as a result of distributing the contributions and earnings 7a company can correct any imbalance in its retirement plans by making additional contributions for its non highly compensated employees or the firm can make distributions from its retirement plans to the highly compensated employees who would then have to pay taxes on the withdrawals 5401 k contribution limits for highly compensated employeesfor 2023 highly compensated employees can contribute up to 22 500 to a 401 k plan if they re age 50 or older they can contribute an additional 7 500 catch up amount in 2024 they can contribute up to 23 000 plus 7 500 as a catch up contribution 4other retirement savings options for highly compensated employeesin addition to your 401 k open a traditional ira to add a pre tax contribution of up to 6 500 in 2023 in 2024 the number rises to 7 000 and the 1 000 catch up amount remains unchanged 4the deduction for contributions is reduced and ultimately phases out if you or your spouse have a workplace retirement plan and your adjusted gross income is above a certain amount 4 however you ll still be able to build your tax deferred retirement savings if you have a high deductible health plan hdhp consider opening a health savings account hsa while helping you save for uncovered healthcare expenses they also provide tax benefits 8you contribute pre tax dollars to an hsa and your earnings grow tax deferred you can invest in a variety of securities including stocks bonds and mutual funds moreover the money you withdraw from it is tax free as long as it s used to pay for qualified medical expenses 8it may not be a tax advantaged account but it can help you build more savings you can invest in all kinds of securities including those with their own tax advantages such as treasury bonds and municipal bonds you can invest as much as you wish and take money out at any time this type of plan allows you to defer a certain percentage of your salary and the taxes you d pay on it typically until after you retire there are no limits to the amount you can defer and the investment options are similar to those available to a 401 k you ll owe taxes on the plan payouts after you retire 94bear in mind that a deferred compensation plan is an asset of the company you don t own it as you do your 401 k if the company fails you won t have access to the compensation you deferred 