To help ensure that companies extend their 401(k) plans to low-paid employees, an IRS rule limits the maximum deferral by the company's highly compensated employees (HCEs) based on the average deferral by the company's non-highly compensated employees (NHCEs). If the less compensated employees save more for retirement, then the HCEs are allowed to save more for retirement. This provision is enforced via "non-discrimination testing". Non-discrimination testing takes the deferral rates of HCEs and compares them to NHCEs. In 2008, an HCE was defined as an employee with compensation greater than $100,000 in 2007, or as an employee that owned more than 5% of the business at any time during the year or the preceding year.[32] In addition to the $100,000 limit for determining HCEs, employers can elect to limit the top-paid group of employees to the top 20% of employees ranked by compensation.[32] That is, for plans with the first day of the plan-year in the 2007 calendar year, HCEs are employees who earned more than $100,000 in gross compensation (also known as 'Medicare wages') in the prior year. For example, most testing done in 2009 was for the 2008 plan-year, which compared 2007 plan-year gross compensation to the $100,000 threshold in order to determine who was an HCE and who was an NHCE. The threshold was $125,000 for 2019, and is $130,000 for 2020.[28]
Account owners must begin making distributions from their accounts by April 1 of the calendar year after turning age 70 1/2 or April 1 of the calendar year after retiring, whichever is later.[15] The amount of distributions is based on life expectancy according to the relevant factors from the appropriate IRS tables.[16] For individuals who attain age 70 1/2 after December 31, 2019, distributions are required by April 1 of the calendar year after turning age 72 or April 1 of the calendar year after retiring, whichever is later.[17]
×