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HOW THE 401(k) NONDISCRIMINATION RULES WORK - PART 1

If you participate in a 401(k) plan, you probably know about the annual limit on the amount of your deferrals (for 2019, $19,000, or $25,000 if over age 50). But if you are a high-paid employee, another limit may apply. Welcome to the IRS nondiscrimination rules! These rules are designed to ensure that retirement plans don’t favor “highly compensated employees” (HCEs) at the expense of other employees. In the 401(k) context, the rules limit the amount of deferrals that HCEs can make, depending on the level of deferrals all other employees make. (The nondiscrimination rules don’t apply to solo 401(k) plans.) HCE’s. You’re an HCE for a particular year if: you, or certain family members, own more than 5% of the plan sponsor during that year or the prior year; or Read More

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