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i'm in a major bind. I was recently notified by my employer that my 2001 401(k) deferrals would be limited to 10%. This is because my income for
2000 was above $85K. However that year was my first with the company and I was given a one-time relocation/moving allowance. I will not receive that
extra income this year and my salary is well below the $85K HCE limit.

I was then told by my the benefits department that the HCE is based on the IRS definition which INCLUDES ALL compensation (including relocation money) and therefore i will be an HCE for 2001.

I want to find out for myself or hear from an unbiased source. does anyone know what the IRS definition of HCE is? or know exactly where i can find it?

Anyway, with this 10% limit on my deferral I will not reach the legally allowed $10,500. What can be done to increase my deferral so that i can reach the
maximum contribution limit? can i defer some of my pre-tax money to my ROTH IRA or variable annuity?

thanks,
kgj
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If you are classed as a Highly Compensated Employee due to moving expenses, that's only for one year. So next year you should be all set to increase those contributions.

In the meanwhile, if you have funds available by all means invest them. Roth IRA should be funded to the $2K max. After that Fools would suggest taxable investments--selected to minimize taxes. That should be long term buy and hold in stocks, such as Rule Makers, a tax managed mutual fund or an index fund. All should generate little taxable income as long as you don't sell the shares--and then you'll pay at long term capital gains rates.
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I was then told by my the benefits department that the HCE is based on the
IRS definition which INCLUDES ALL compensation (including relocation
money) and therefore i will be an HCE for 2001.

I want to find out for myself or hear from an unbiased source. does
anyone know what the IRS definition of HCE is? or know exactly where i can
find it?


First of all, it's to the benefit of the other HCE's if you are NOT determined to be a HCE (due to the way the ADP/ACP test works). So I don't believe you have to worry about your employer being biased. It appears to me (given the information you've provided), that they've correctly determined that you are a HCE for 2001. The fact they correctly knew that the moving allowance counted as a part of the compensation used to determine whether you are HCE, illustrates to me that they've researched this.

Anyway, with this 10% limit on my deferral I will not reach the legally
allowed $10,500. What can be done to increase my deferral so that i can
reach the
maximum contribution limit?


I don't know if you'd want to go down this route, but you could challenge the 10% limit that's being communicated to you. I believe that legally this limit can only be placed on you if it's a provision of the plan. In other words, the plan would need to specifically state that HCE's are limited to 10% annual deferrals. Instead, what may be taking place is that your employer is simply setting this 10% limit despite what the plan says, in an attempt to reduce or eliminate the chance that any (or certain) HCE's will have to take corrective refunds. This may be their current office policy for their HCE's, but the plan document is your overriding legal resource. Caution: if you find that you're not truly limited to 10% by the plan document, you may risk alienating your employer if you try and push this issue.

dogbo
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thanks dogbo & paul. i am still trying to resolve this with my employer (more specifcally, our benefits department). the argument comes down to this, "what is meant by compensation?"

i have found nothing in my research (IRS tax codes and other websites) that suggests compensation is interchangeable with taxable income. the benefits dept is basically trying to define eligible compensation as taxable income (i.e., ALL sources of income including this moving allowance!)

my understanding of compensation is that its payment "for services rendered" and therefore moving allowances are not included.

do you guys (or does anyone) know the IRS definition of compensation versus taxable income or how compensation is defined within HCE?
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my understanding of compensation is that its payment "for services rendered" and therefore moving allowances are not included.

The Internal Revenue Code defines how compensation is determined for the purposes of determining HCE's. There isn't a literal distinction made between pay earned for services rendered and pay this is earned otherwise.

do you guys (or does anyone) know the IRS definition of compensation versus taxable income or how compensation is defined within HCE?

I've got a resource book that provides this information. I'll look it up in the next day or two and post it here.

dogbo
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do you guys (or does anyone) know the IRS definition of compensation
versus taxable income or how compensation is defined within HCE?


Compensation used to determine HCE's is referred to as section 415 compensation and is defined specifically in the plan document (generally speaking there are 3 possible 415 definitions: current includidible, W-2, and Sect. 3401(a)). In addition, the general definition of section 415 compensation can be found in Treas. Reg. Section 1.415-2(d).

To answer your question "is moving allowances included in section 415 pay", the answer appears to be "possibly". As you'll see, there can be exceptions. I'll hit on each of the 3 types of 415 pay and how moving allowance might be treated under each.

CURRENT INCLUDIBLE COMPENSATION

If in checking your plan document you find that its' section 415 compensation definition is defined as "current includible compensation" per Treas. Reg. Sect. 1.415-2(d)(2), then the following types of income are included in determining your highly compensated status.
* overtime
* bonuses
* commissions
* tips
* fringe benefits ( e.g. taxable use of company vehicle)
* reimbursements or other expense allowances under a nonaccountable plan (as described in Treas Reg. Sect 1.62-2(c).
The reg. specifically mentions "moving expenses" as being included in the definition of this type of compensation. This assumes that the moving expenses/allowances are non-deductible.

IMPORTANT NOTE: There is a safe harbor rule discussed in Treas. Reg. Sect. 1.415-2(d)(10) that IF adopted by your employer's plan, specifically EXCLUDES moving expenses (among others) from the 415 definition of compensation. However the plan must specifically state that its' using the safe harbor rule for this to apply.

W-2 PAY or 3401(A) PAY

If the plan uses one of these definitions, it appears that moving allowance might be excludible in determining your 415 pay. Treas Reg. Sect. 31.3104(a)-4 suggests that payments made as a reimbursement or other expense allowance arrangement are EXCLUDIBLE if the amounts are treated as paid under an accountable plan (as defined in IRC Sect 62 and Reg. Sect 1.62-2.

Bottomline: If your plan uses the first 415 definition (includible income), your allowance is most likely includible (unless they've specified the safe harbor rule.) If your plan uses W-2 or 3401(a) definitions, than it appears that moving allowances could be excludible if paid under something called an "accountable plan". (sorry...I can't help you more on term "accountable plans" as I'm unfamiliar with that device.)

Now, so I don't get myself in trouble --> This information is supplied to you based on research I've done and is only meant as FYI. I am NOT an attorney and this information should not be construed as legal advice. If you have specific questions concerning your situation, you should consult your tax and/or legal advisor. The primary resource used to obtain this information: "The ERISA Outline Book", Vol. 1, by Sal Tripodi (1999/2000).

dogbo
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I'm not so sure that the Plan can pick and choose the Pay definition for HCE determination purposes. My reasoning for questioning it is that the HCE definition is an overriding guideline that may cut across all plans.

I know that all 3 of those definitions can be used to determine contributions to the plan.

Reg 1.414(q) has some Q&A about HCEs if you haven't already read it.
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thanks dogbo & bandbo. i had already read the tax code sections 414 & 415. it was sorta confusing to me, but i thought (like bandbo suggests) that compensation was defined by all three and not singularly chosen by the company's plan.

however, dogbo's explaination makes sense in that information i received from the company (benefits dept) was for taxable income and the description was similar to includible income.

things are somehow more clear, yet more confusing. :>)

i will review tax code sections again as well as that "ERISA outline" book.
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