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Looking for guidance on following situation:

If someone works for two employers who both offer 401k. Is the HCE qualification based on the compensation from the EMPLOYER for which the employee chooses to opt for 401K (or) HCE qualification is determined based on total compensation across both employers?

Example:

Employer A wages are say 100K. Employer B wages are say 100K (Both employers are small, like 10 member companies). Both employers using same payroll provider, assume ADP.

If Employee would like to use "Employer A" provided 401K service and contribute the 20,500 towards 401k, would it be an issue because the total wage is more than allowed 130K or so.

Appreciate any inputs on this. Thanks!

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Is the HCE qualification based on the compensation from the EMPLOYER for which the employee chooses to opt for 401K (or) HCE qualification is determined based on total compensation across both employers?

It's only from the single employer's point of view. One reason for this is it's entirely possible that each employer doesn't even know about the other, if you choose not to disclose it. Generally your other income outside of one employer is none of their business.

As stated in the IRS HCE summary (emphasis mine):

An employee is an HCE under the compensation test (as determined under IRC Section 415(c)(3)) if he or she received compensation from the employer in excess of...

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  • Thank you @TTT, yes I choose not to disclose it. One twist here is, both payrolls are being run by same 3rd party payroll provider. Need to work with them so they don't confuse it as from one employer instead of two.
    – kosa
    Oct 3, 2022 at 4:18
  • @kosa I doubt you need to worry about that. Companies don't need to ask their payroll providers how much their employees get paid. The companies know how much they are paying their employees, and they tell the payroll provider how much to pay.
    – TTT
    Oct 3, 2022 at 13:25
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    @kosa on a related side note, if you have two employers and the combined total is over the limit for withholding social security, it works similarly. Even though the payroll provider could know you're over the limit, it would still withhold up to the limit for each employer, since they are independent. In that case it would be up to you to report the overage using 1040 Schedule 3 to get a credit for excess SS. I bring this up simply to provide an example where the payroll provider shouldn't share information with each company, even for something super obvious like SS which has a hard limit.
    – TTT
    Oct 3, 2022 at 14:19
  • Got it, thank you!
    – kosa
    Oct 4, 2022 at 13:22
  • @kosa Things might be different if the payroll outsourcing is done via co-employment rather than outsourced pay-related IT services.
    – Ben Voigt
    Oct 4, 2022 at 15:46
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Even if you received more than $130K from both employers, one could fail the test and the other pass the test. The idea of the test is to construct a 401(k) program that isn't used just by the highest paid employees.

If a company had to consider the total income from somebody that wasn't on-track to be highly compensated by them, then somebody that worked for the company for just a few weeks of the year could cause them to pass or fail the test without them being able to control for it.

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  • Does this mean this HCE is done by employer (or) IRS? my understanding is IRS asks employer to audit in case of an employee has pay more than HCE and opted for 401k, which is what prompted me for this question. IRS perspective I would be earning more than 130K which make sense, but in employer perspective it would be let us say less than 100K and confusion arises. Hope you got my point.
    – kosa
    Oct 3, 2022 at 4:22

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