Hi everyone, I’m feeling stuck and hoping someone here can help. I recently got an email from HR saying I’m considered a “highly compensated employee” (HCE) and now eligible for a deferred compensation plan instead of my 401k. After researching the deferred plan, I decided it’s too risky for me—I don’t like that if the company goes bankrupt, I could lose all my contributions.
So, I thought I’d just stick with my 401k. But when I checked my recent paychecks, I noticed no money was going into it. I logged into Fidelity, and it said I’m not allowed to contribute. When I called HR, they told me HCEs like me aren’t eligible for the 401k.
For reference, I’m 32 and made $175,000 last year. My base salary is $75,000, but the rest comes from bonuses (10% of the cash flow I bring in). My income is very inconsistent—I made $122,000 in 2023 and $86,000 in 2022.
I guess my questions are: Is this even allowed? Can my employer really take away 401k benefits? And what are my options if I can’t do a regular IRA either? I’ve read about backdoor IRAs, but even that’s capped at $7,000 a year.
Any advice would be appreciated. Retirement feels far off, but this situation is stressing me out!
Yeah, this is a real thing. HCE rules are designed to prevent companies from creating 401k plans that only benefit top earners while leaving regular employees out. If not enough lower-income employees participate in the plan, HCEs can be restricted from contributing to keep the plan from being “top heavy.”
Basically, it sounds like your coworkers aren’t contributing enough to balance out the high earners like you. The company would have to match more money for lower earners to fix this, but many companies don’t want to spend the extra cash.
Casey said: @Kieran
That’s likely illegal unless your work arrangement changes drastically.
Why?
If the company controls when, where, and how you work, they’re required to classify you as an employee (W-2). Independent contractor status is only for people who have more control over their work setup.
The issue is that not enough lower-paid employees at your company are using the 401k, so it fails the “top-heavy” test. This is supposed to make sure 401ks aren’t just for high earners. A better-managed plan would try to encourage more participation by offering better perks to employees at lower income levels.
It sounds like your company doesn’t prioritize this, which is why you’re stuck in this situation. Maybe bring this up to HR?
@Rowan
You’re right—it’s not a great plan. Just a 3% match. Where should I invest for retirement if I can’t do a 401k or regular IRA? Even a backdoor IRA only lets me contribute $7,000 a year.
This is a federal law, not your employer’s choice. The rules are there to make sure 401k plans benefit everyone, not just the top earners. Unfortunately, in industries with high turnover or low participation (like retail or hospitality), this becomes a common problem.
You could ask HR to switch to a “safe harbor” 401k plan, which avoids these restrictions by offering better matches or contributions to lower-paid employees. But these plans are expensive, so most companies don’t bother.
As for the deferred compensation plan, they’re not as risky as they sound. If you’re confident in your company’s stability, it might still be worth considering. You can always leave the company and withdraw your money if things look shaky. Backdoor Roth IRAs are another solid option, and using index funds for taxable investing works well too. You’re already making smart moves—keep at it!
The rules aren’t about stopping you from contributing to a 401k, but they’re designed to make sure the plan isn’t just benefiting high earners. If you have the option, you should still contribute—it’s worth it in the long run.
I design 401k plans, and this situation is avoidable if the plan is set up differently. Your HR could amend the plan to allow HCEs to participate. It’s worth asking them to contact the provider.
In the meantime, you can use a backdoor Roth IRA ($7,000 per year) and invest in a taxable account using index funds. It’s not ideal, but it’s still a solid strategy.
