Unable to max 401K

[Megalops]

So I find out today the 4K check I got from vanguard is due to my hospital megacorp not having enough low wage participants. I guess I don't really have a question just wondering if anyone else has had similar issues. While I plan on putting it directly in my taxable vanguard account this leaves a bad taste that I'm punished for something completely out of my control. HR did mention that new hires are automatically enrolled starting 1/18 and they hope this will help prevent this from next year.

[q-school]

If you are asking about a hospital returning 401 money to highly compensated employees because of failing some discrimination test, then yes I have had that happen to me.

[Hatton]

It has never happened to me because I am in solo practice.

[VagabondMD]

Brutal.

But hardly devastating.

[jhwkr542]

Hasn't happened personally buy have heard of several instances. Not really crushing financially. And nothing you can do much about.

[RocDoc]

This situation happened to me about 18 years ago when I was still an employee. Just take the check and put it in your taxable account and you'll still do well. The taxable account has some advantages and you will pay less tax on the withdrawals from the taxable account than you pay from your 401k withdrawals. When I was younger I always wished there were much higher limits for 401k contributions. But I'm sure liking the flexibility and freedom of having a large taxable account now. And no government can make you take RMDs from taxable accounts.

[litovskyassetmanagement]

Megalops wrote:

So I find out today the 4K check I got from vanguard is due to my hospital megacorp not having enough low wage participants. I guess I don’t really have a question just wondering if anyone else has had similar issues. While I plan on putting it directly in my taxable vanguard account this leaves a bad taste that I’m punished for something completely out of my control. HR did mention that new hires are automatically enrolled starting 1/18 and they hope this will help prevent this from next year.

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Some plan sponsors are just too greedy to make their plan into a safe harbor plan by providing either a 3% non-elective or a 4% match (or equivalent) to satisfy safe harbor requirements.  So HCEs like yourself pay for that.  This is usually done when there are many rank and file staff, and the management decided to save some money and play the top heavy game.  By the way, they don't have to distribute the money to the HCEs, they can simply put in a minimum to avoid being top heavy, and they chose not to do that.

I usually see this happening for smaller practices whose plans are mismanaged (or are sold to them as 'no cost' plans, which turns out to be false when the plans become top heavy right away), but I also see larger companies sometimes capping their HCE staff contributions to a certain % of pay for that reason, and some staff can't put away $18k until their W2 gets to be high enough.  But a large company that knows that this will happen (or has a history of this happening often), that would be simply unprofessional. This is just a business decision they made to save money, which I think is just terrible because a good retirement plan is a valuable benefit, and if doesn't feel particularly good when your employer sends you back a check because they can't keep their plan under control.

[jfoxcpacfp]

It's a business decision and it's how the IRS plan rules work, don't exactly see it as greedy or terrible. Not an uncommon occurrence for physicians working in large practices/corps, but the automatic signup should help your situation.

[litovskyassetmanagement]

jfoxcpacfp wrote:

It’s a business decision and it’s how the IRS plan rules work, don’t exactly see it as greedy or terrible. Not an uncommon occurrence for physicians working in large practices/corps, but the automatic signup should help your situation.

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It really comes down to whether the practice values their employees or not.  None of the plans that value their employees do that (none of ours do, that's for sure).  Also, some practices might not have a safe harbor but they would never send checks to HCEs, they would simply make a top heavy minimum contribution.  Whenever I see the practice of sending a check back, I always see a mismanaged retirement plan, never a plan that's designed for the benefit of plan participants.

[jfoxcpacfp]

Kon Litovsky wrote:

jfoxcpacfp wrote:

It’s a business decision and it’s how the IRS plan rules work, don’t exactly see it as greedy or terrible. Not an uncommon occurrence for physicians working in large practices/corps, but the automatic signup should help your situation.

Click to expand…

It really comes down to whether the practice values their employees or not.  None of the plans that value their employees do that (none of ours do, that’s for sure).  Also, some practices might not have a safe harbor but they would never send checks to HCEs, they would simply make a top heavy minimum contribution.  Whenever I see the practice of sending a check back, I always see a mismanaged retirement plan, never a plan that’s designed for the benefit of plan participants.

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So are practice owners that use SIMPLE plans greedy, too? How about those that don't pay for 100% of employee health insurance? Or those that don't have Euro-style vacation and benefits for there employees? Do they not "value their employees"? I get so tired of the word "greedy" being tossed around just because someone is offended. There may be many good reasons for a business owner or corporate BOD making a decision that you are not personally privy to.

[G]

Ugh, sorry to hear that.  Kon and Johanna:  Does Megalops have an option of putting that money somewhere else on his/her own?

I hope to soon be unable to max my 401k/profit-sharing, but for a good reason: part-time.

[jfoxcpacfp]

G wrote:

Kon and Johanna:  Does Megalops have an option of putting that money somewhere else on his/her own?

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Sure, Megalops can use it for a backdoor Roth, a taxable account, or his/her emergency fund. S/he just can't use it as a 401k contribution for 2016. (That is pretty late in the year to be finding this out, btw.)

Congratulations on your upcoming change in work schedule, G!

[litovskyassetmanagement]

jfoxcpacfp wrote:

Kon Litovsky wrote:

jfoxcpacfp wrote:

It’s a business decision and it’s how the IRS plan rules work, don’t exactly see it as greedy or terrible. Not an uncommon occurrence for physicians working in large practices/corps, but the automatic signup should help your situation.

Click to expand…

It really comes down to whether the practice values their employees or not.  None of the plans that value their employees do that (none of ours do, that’s for sure).  Also, some practices might not have a safe harbor but they would never send checks to HCEs, they would simply make a top heavy minimum contribution.  Whenever I see the practice of sending a check back, I always see a mismanaged retirement plan, never a plan that’s designed for the benefit of plan participants.

Click to expand…

So are practice owners that use SIMPLE plans greedy, too? How about those that don’t pay for 100% of employee health insurance? Or those that don’t have Euro-style vacation and benefits for there employees? Do they not “value their employees”? I get so tired of the word “greedy” being tossed around just because someone is offended. There may be many good reasons for a business owner or corporate BOD making a decision that you are not personally privy to.

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I always recommend to doctors to pick a plan/design to minimize employer contribution, so I'm with you on that. There is absolutely no reason to pay more than you have to and to get the best benefit for the buck. But on the other hand, I also have to represent employees as a fiduciary, and doctors as employees are the ones who get the shaft just because they are HCEs. So the compromise is to have it both ways: design a plan to minimize employer contributions, but be fair to your employees as well, especially the ones who make you all of the profits.  This can get challenging, and not all plan sponsors want to spend the time to figure this one one, and frankly, this is not always possible, but if you do offer a benefit, make sure that it is actually a benefit. Don't offer a 401k plan at all if you can't offer one that works for your HCE employees especially.  Offer a SIMPLE.

EDIT: I'm talking here about BIG practice plans, not small ones.  Small ones have very compelling reasons to limit HCE employer contributions, if HCEs work as associates - the cost can be really high for those, but not so high for a huge practice which doesn't even have profit sharing for HCEs (which sounds like OP's situation).

[litovskyassetmanagement]

G wrote:

Ugh, sorry to hear that.  Kon and Johanna:  Does Megalops have an option of putting that money somewhere else on his/her own?

I hope to soon be unable to max my 401k/profit-sharing, but for a good reason: part-time.

Click to expand...

Depending on what type of a 401k plan you have, there may be an option to do after-tax contributions, so if your net is lower what can max it out, you might have the option of adding after-tax contributions to the mix.  So you can technically max out a 401k with $54k in net profit ($18k salary deferral and the rest after-tax). But for that you need full control over your plan document.