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My girlfriend, a Highly Compensated Employee (HCE rules in effect), has her 401k contributions in check by her plan and HR. However, she is also 50+, thus eligible for the Catch Up provision for $5500 this year. I would like her to contribute to this in spite of what seem to be HR objections as to timing. Can a company limit catch up provisions to only year end? She could go many months without contributions before resuming to do catch up? This mechanism seems arbitrary. Is it allowed?

Additional information:
Her HR department limits catchup provisions to November and December only, and limited to 50% of paycheck. This virtually guarantees her contributions to come in under the $5500 allowed.

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2 Answers

IRS rules are often limits, but not strict minimums. In this case, a company is permitted to enforce lower deposits as a percent of income to avoid 'top heavy' violations, in which case she'd be getting money back at year end.

More important, are these deposits matched, and are you aware of the fees inside the 401(k)? To me, those two answers are as important as the amount deposited.

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There is no match. I am unclear about the fees of her plan. –  wbogacz Feb 18 '13 at 23:08
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There is a level of fee, above which, one shouldn't even use the 401(k). It's not a hard number, but consider, a 1% fee will cost nearly 10% over a decade, and the 401(k) turns potential 15% cap gains into ordinary income. This above all, you need to find out. –  JoeTaxpayer Feb 18 '13 at 23:48
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You might find this article, -- the first hit on Google if one searches for "HCE and catchup provisions", by the way -- of interest. It says, among other things,

If your plan has restrictions that prevent you from contributing the maximum regular contribution ($17,000 for 2012), you can still make catch-up contributions on top of your other limit. This even holds true if your contributions are capped because you are considered a highly compensated employee (HCE). Indeed, the IRS is willing to let employers classify excess 401k contributions as catch-up contributions. So, if you are an HCE who is 50 or older, and your plan allows catch-up contributions, you should be able to contribute over your HCE limit without worrying about a refund.

What I don't understand, though, is your claim that catch-up 401k contributions limited to 50% of salary earned in November and December will not allow your HCE 50+ girlfriend to contribute the full $5500 amount. An HCE is generally defined as a person earning more that $100K per year and so the salary earned in November and December would total at least $100K/6 = $16666 which would readily allow the full catch-up contribution. If your girlfriend is on hourly wages and you folks are planning on a 4-week vacation in November and December, perhaps some re-planning might help resolve the contribution problem.

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