Ever wondered if your high salary could actually limit your retirement savings? It’s a question that hits home for many top earners who diligently contribute to their 401(k) plans, only to find out there’s a catch. As someone who’s navigated the maze of personal finance, I’ve seen how these lesser-known rules can trip up even the savviest savers. For highly compensated employees (HCEs), the IRS imposes specific restrictions that can affect how much you can tuck away for retirement—and it’s not just about the annual contribution cap.
Understanding 401(k) Limits for High Earners
The world of 401(k)s is full of numbers, but for high earners, a few stand out like neon signs. The IRS doesn’t just set a universal cap on contributions; it throws in extra layers of complexity for those earning big bucks. Let’s dive into what it means to be an HCE and how these rules shape your retirement strategy.
Who Qualifies as a Highly Compensated Employee?
An HCE isn’t just someone with a hefty paycheck. According to the IRS, you’re an HCE in 2025 if you earn more than $160,000 annually (up from $155,000 in 2024), own over 5% of the company, or rank among the top 20% of earners at your firm (provided you still clear that income threshold). These folks are the ones the IRS watches closely to ensure 401(k) plans don’t disproportionately favor the top dogs.
Fairness in retirement plans is key. The IRS ensures everyone gets a shot at building wealth, not just the highest earners.
– Financial planning expert
Why does this matter? Because being labeled an HCE triggers specific nondiscrimination tests that can limit your contributions or even force refunds if your plan doesn’t pass muster. It’s like being penalized for earning too much—frustrating, right?
Key 401(k) Contribution Limits for 2025
For most employees, the 401(k) contribution limit is straightforward: $23,500 in 2025 if you’re under 50, or $31,000 if you’re 50 or older, thanks to a $7,500 catch-up contribution. But for HCEs, the IRS adds a few curveballs. Here’s what you need to know:
- Matching Contribution Cap: Employers can only match contributions on income up to $350,000 in 2025 (up from $345,000 in 2024). If you earn more, your match might not cover your full contribution.
- Absolute Limit: The total contributions to your 401(k)—from you, your employer, and any other sources—can’t exceed $70,000 if you’re under 50, or $79,000 if you’re 50 or older. This includes everything: employee contributions, employer matches, and even after-tax contributions.
Let’s break this down with an example. Say you earn $400,000 and contribute the max $23,500 to your 401(k). Your employer offers a 100% match on up to 5% of your salary. You’d expect a $20,000 match (5% of $400,000), but the IRS caps the matchable income at $350,000. So, your employer’s contribution is limited to $17,500 (5% of $350,000). That’s $2,500 less than you might’ve hoped for.
Nondiscrimination Testing: The Hidden Hurdle
Here’s where things get tricky. The IRS requires every 401(k) plan to pass nondiscrimination tests annually to ensure the plan doesn’t favor HCEs over non-HCEs (NHCEs). These tests compare contribution rates to make sure the plan is fair across the board. If HCEs contribute too much relative to NHCEs, the plan fails, and you could face consequences.
What happens if the plan flunks the test? HCEs might have to take back some of their contributions—called a refund of excess contributions. These refunds are taxable in the year they’re distributed, and you lose the tax-deferred growth those funds could’ve earned. Talk about a gut punch! Employers might also make additional contributions to NHCEs to balance things out, but that doesn’t help your retirement account.
A failed nondiscrimination test can feel like a penalty for saving too much. It’s a wake-up call to explore other options.
– Retirement advisor
In my view, this is one of the most frustrating aspects of being an HCE. You’re doing everything right—saving diligently, maximizing contributions—but the rules can still clip your wings. That’s why it’s crucial to know your options.
Strategies to Maximize Your Retirement Savings
Being an HCE doesn’t mean you’re stuck with limited retirement savings. There are clever ways to work around these restrictions and build a robust nest egg. Here are some strategies that I’ve found particularly effective:
Mega Backdoor Roth IRA
One of the slickest moves for HCEs is the Mega Backdoor Roth IRA. This strategy lets you contribute way more to a Roth IRA than the standard $7,000 limit (in 2025). Here’s how it works: you make after-tax contributions to your 401(k) beyond the $23,500 limit, then roll those funds into a Roth IRA. When done right, this can mean tax-free growth on tens of thousands of dollars.
Not all 401(k) plans allow this, so check with your plan administrator. If it’s an option, it’s like finding a hidden treasure chest for your retirement.
After-Tax Contributions
Don’t confuse these with Roth contributions. After-tax contributions are another way to pump extra money into your 401(k), which you can later roll into a Roth IRA. The beauty here is that the earnings grow tax-free in the Roth account. For HCEs, this can be a game-changer, especially if your plan allows in-service distributions.
Deferred Compensation Plans
If your company offers a deferred compensation plan, jump on it. These plans let you set aside a chunk of your income to be paid out later—often in retirement, when you might be in a lower tax bracket. It’s a sneaky way to reduce your taxable income now and save more for the future.
Health Savings Accounts (HSAs)
HSAs are like the Swiss Army knife of retirement planning. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. Since healthcare costs can be a major expense in retirement, maxing out your HSA each year (up to $4,300 for individuals or $8,550 for families in 2025) is a no-brainer.
HSAs are an underutilized gem for high earners. They’re like a 401(k) for your medical bills.
– Personal finance expert
I’ve always been a fan of HSAs because they offer flexibility that 401(k)s don’t. You can use them for medical expenses now or save them for retirement, making them a powerful tool for HCEs.
Common Questions About HCEs and 401(k)s
Navigating the 401(k) world as an HCE can spark a lot of questions. Here are some of the most common ones I’ve come across:
- What happens if I contribute too much? If your plan fails nondiscrimination testing, you might get a refund of excess contributions. These are taxable and lose their tax-deferred status.
- Can I still max out my 401(k)? Yes, but your employer’s match might be limited, and nondiscrimination tests could reduce your contributions.
- Are there age-based limits? If you’re 50 or older, you can add a $7,500 catch-up contribution, raising your total limit to $31,000 (or $79,000 absolute limit).
These questions highlight why it’s so important to stay informed. Knowledge is power when it comes to outsmarting the IRS’s restrictions.
The Bigger Picture: Planning for Your Future
Being an HCE comes with its perks—higher income, more opportunities—but it also means navigating a minefield of 401(k) restrictions. The IRS’s goal is to keep retirement plans fair, but that can feel like a roadblock when you’re trying to save aggressively. My take? It’s all about playing the long game.
By combining strategies like the Mega Backdoor Roth, after-tax contributions, deferred compensation, and HSAs, you can build a retirement portfolio that’s as robust as your paycheck. It’s not just about working around limits; it’s about finding creative ways to make your money work harder.
| Strategy | Key Benefit | Best For |
| Mega Backdoor Roth | Tax-free growth on large contributions | HCEs with flexible 401(k) plans |
| After-Tax Contributions | Rollover to Roth IRA for tax-free earnings | Those with in-service distribution options |
| Deferred Compensation | Tax savings in lower bracket years | HCEs with access to such plans |
| HSAs | Triple tax benefits for medical costs | All high earners |
Perhaps the most interesting aspect of all this is how it forces you to think outside the 401(k) box. Sure, it’s a great tool, but it’s not the only one in your financial toolbox. Diversifying your savings approach can lead to a more secure retirement.
In the end, being an HCE means you’ve got the income to build serious wealth, but it also means you’ve got to be strategic. The IRS’s 401(k) limits are just one piece of the puzzle. By staying informed and exploring all your options, you can turn those restrictions into opportunities. So, what’s your next move? Maybe it’s time to have a chat with your financial advisor and start mapping out a plan that maximizes every dollar you earn.
