Aaaah - I just lost a long reply.....I'll try again!
This is a big problem with retail phrmacists.
The contribution maximums & definitions for highly compensated employees is set by the IRS annually. For 2006 - a highly compensated employee is one who makes greater than $100,000 (last year it was $96,000) & the maximum is $15,000 with an extra $5000 for those over 50.
The maximum % you can contribute is determined by your employer & can be as high as 40%. If they match, it is ususally lower - your employer will choose the rate & maximum amount they match. HOwever, if there is no match, it really is what you can afford, up to the amount allowed by the IRS.
The determination if the highly compensated employee participation rule becomes an issue because each year, the employer's retirement plan must demonstrate a set participation by lower compensated employees in proportion to the higher compensated employees. So...if there is not enough participation, IRS rules require the contribution is less. For my corporation last year (the max was $14,000), because there was not enough participation from low paid employees - the maximum was reduced to $8500. The participation is not determined until the end of the retirement plan year.
This is a problem in 2 ways:
First - you get a check back for $5500 with all taxes taken out in Jan - unplanned.
Second - you can't rely on a set amount each year you can set aside for retirement.
This is not as much of a problem in hospitals because there are more highly compensated employees & the employees, in all pay categories, generally tend to be more educated which has been shown to increase retirement participation. (Remember - all those courtsey clerks, or stock clerks who are high school or college students count - it is not just full time employees)
The maximums are determined by the IRS & change every year. That is why some of us choose to work only to the maximum which will not make us highly compensated employees - in the case this year to $100,000 & then work elsewhere. It saves the maximum 401K contribution & allows participation in not just another work environment, but also in another retirement plan.
If you are a business owner, the rules are different.
Its confusing, but I hope this helps.
