One of the benefits that make tax-deferred retirement accounts like 401(k) plans so attractive is their high contribution limits. This becomes especially appealing when your company offers a 401(k) employer match. However, some plans restrict highly compensated employees (HCEs) from making the maximum contribution. Nonetheless, you can avoid these restrictions and find ways to maximize your retirement savings. But first, determine if you are a highly compensated employee.

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What Is a Highly Compensated Employee?

The HCE classification helps ensure that retirement benefits are distributed equitably across all income levels within a company. Employers must identify HCEs to comply with IRS nondiscrimination testing, which prevents workplace retirement plans from disproportionately favoring high earners.

The IRS defines an HCE according to the following income and ownership criteria:

• Officers making over $160,000 in 2025 (up from $155,000 for 2024)
• Owners holding more than 5% of the stock or capital

Compensation doesn’t just cover what you get from your employer in the form of a recurring paycheck. It also encompasses earnings from overtime, bonuses, commissions, as well as deferred salary contributions to cafeteria plans and 401(k)s accounts. According to the IRS, your employer can choose to designate you an HCE if you rank among the top 20% of employees when it comes to compensation.

Meanwhile, ownership includes shares held directly or indirectly through family attribution rules, meaning an employee may be classified as an HCE due to stakes held by a spouse, children or parents.

That 5% rule mandates that 401(k) plan participants who are more than 5% owners of the employer must start required minimum distributions (RMDs) by April 1 of the first year after the calendar year in which the participant reaches age 73. This rule can be a bit vague. It’s based on the value of company shares. But it doesn’t just count what you own. It also covers ownership attributed to your spouse, children and grandchildren working for the same company. So if your holdings in the company are worth 3% and your son owns 2.2% in the same firm, you’re considered an HCE. That’s because your total ownership amounts to 5.2%.

HCEs and Nondiscrimination Testing

The IRS uses these rules to ensure that 401(k) plans do not disproportionately benefit high earners at the expense of lower-paid employees. Employers conduct annual nondiscrimination tests, such as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to compare the participation and contribution rates of HCEs and non-highly compensated employees (NHCEs).

If an HCE’s contributions exceed the permitted ratios, corrective measures may be necessary, such as refunding excess contributions or adjusting employer match allocations.

401(k) Contribution Limits and Highly Compensated Employees

Before we explore how restrictions may apply to you, here’s what you need to know about maximum 401(k) contribution rules that apply to all. For 2025, a 401(k) participant filing single can contribute up to $23,500 (up from $23,000 in 2024).

Employees age 50 and older can also direct an additional $7,500 in “catch-up” contributions, bringing total employee contributions to $31,000 in 2025. However, 401(k) participants between 60 and 63 years old can make “super catch-up” contributions of up to $11,250 in 2025, bringing their total to $34,750.

Including both employee and employer contributions, the total limit for 2025 is $70,000 ($77,500 with standard catch-up contributions and $81,250 with enhanced catch-up contributions).

Contribution Limits for HCEs

Being classified as an HCE can limit an individual’s ability to maximize tax-advantaged retirement contributions, particularly in companies where non-HCE participation is low. Some employees may explore alternative savings strategies, such as deferred compensation plans, after-tax 401(k) contributions, or individual retirement accounts (IRAs), to supplement their retirement savings.

Employers, on the other hand, may adopt strategies like automatic enrollment or enhanced employer matching to encourage broader participation among NHCEs and improve nondiscrimination test results.

For employees nearing the highly compensated threshold, monitoring annual earnings and understanding how employer plan rules interact with IRS regulations can help manage retirement contributions effectively. While HCE status does not prohibit high earners from contributing to a 401(k), it introduces additional considerations that can influence long-term retirement planning strategies.

Should an HCE Still Contribute to a 401(k)?

Assuming you have yet to reach the contribution limit for your 401(k), the answer is most likely yes. But the advisability of such a plan can be hindered if your employer’s plan is “top heavy.” A plan is top-heavy when the owners and most highly paid employees, also known as “key employees,” own more than 60% of the value of the plan assets, the IRS says. In such cases, the employer generally has to pay a minimum 3% benefit into the 401(k) accounts of lower-paid employees, also known as “non-key employees.”

Key employees at a company earn at least $230,000 in 2025, up from $220,000 in 2024. The annual limit on compensation that can be taken into account for contributions and deductions increased to $350,000 in 2025 (up from $345,000 in 2024).

However, 401(k) plans are exempt from yearly top-heavy testing if they are safe harbor 401(k) plans that receive minimum safe harbor contributions or elective deferrals. Safe harbor 401(k) plans, however, are not subject to specific IRS nondiscrimination tests, which are described in further detail below. This is the main motivation for creating a safe harbor 401(k). It frees business owners from worrying about whether their plan is in danger of violating the test and potentially running into issues with the IRS.

In exchange, the business owner has to offer a minimum employer match. There are three basic types of matches the employer can offer:

• Non-elective: A contribution of 3% to all employees. This goes to every employee, even those who don’t contribute themselves
• Basic: A dollar-for-dollar match of the first 3% of an employee’s compensation and 50 cents on the dollar for the next 2%.
• Enhanced: The employer matches 100% of the first 4% of an employee’s contribution.

Employer matches under a safe harbor 401(k) must vest immediately, meaning receiving the money is not contingent on working for the company for a certain period.

What to Do If You Max Out Your 401(k) Contributions

If you’re an HCE who maxed out your contributions in the previous year, you may not know if the company failed the top-heavy test until the following year. If so, your firm would most likely refund you the excess contributions you made. This will count as taxable income. So it could increase your tax liability for the current year. Plus, the money coming back reduces the tax savings and earnings potential of your 401(k).

So you may want to set some cash aside to cover a potential tax hike. Or you can make an estimated tax payment. At some points, it may be best to hold off on reaching your 401(k) maximum contribution until you know whether you will face restrictions. The right move in this situation will depend on your own individual goals, which you can consult with a financial advisor about.

Other Retirement Accounts HCEs Can Consider

When it comes to a 401(k), you can still contribute as much as your employer will allow HCEs to contribute without penalty. Nonetheless, you may want to look at ways to maximize your retirement savings beyond a 401(k). Let’s explore some options below.

1. Make Non-Deductible Contributions to a Traditional IRA

If you’re an HCE as described above and covered by an employer-sponsored retirement plan, you’re not eligible to make tax-deductible contributions to a traditional IRA account. That benefit phases out after certain income thresholds. That starts to happen when your modified adjusted gross income (MAGI) reaches $79,000 (or $126,000 if married and filing jointly) in 2025 and $77,000 (or $123,000 if married and filing jointly) in 2024.

For 2025, the IRA deduction benefit is phased out completely when your MAGI reaches $89,000 (or $146,000 if married and filing jointly. For 2024, the same happens when your MAGI reaches $87,000 (or $143,000 if married and filing jointly).

However, you can still open a traditional IRA and fund it. In addition, your earnings will grow tax-deferred. And you can contribute toward the full IRA contribution limit. For 2024 and 2025, the contribution limit for an IRA stands at $7,000 and $8,000 for people 50 and older.

Overall, you won’t get the full benefit of a traditional IRA but non-deductible contributions can serve as a nice supplement to your 401(k), especially when the plan puts some restraints on you.

2. Open a Roth IRA

Instead of using pre-tax dollars, a Roth IRA is funded with after-tax dollars. By paying taxes on the money upfront, your money grows tax-free.

For 2025, you can make a full Roth IRA contribution if your modified adjusted gross income (MAGI) is less than $150,000 as a single filer or head of household, and $236,000 if you’re married and file jointly. However, partial contribution limits kick in for single filers/heads of household with MAGI between $150,000 and $165,000 and married couples filing jointly with MAGI between $236,000 and $246,000. Tax filers lose the ability to contribute to a Roth IRA in 2025 once their MAGI exceeds those limits.

Here are the income limits for Roth IRA contributions for tax years 2024 and 2025:

Despite income limitations, you can still enjoy some tax benefits using a Roth IRA. As long as you’ve had your Roth IRA for at least five years, you can make eligible withdrawals tax-free in retirement.

3. Backdoor Roth IRA Conversion

HCEs may also be interested in going through a backdoor IRA. This process describes converting a nondeductible IRA into a Roth IRA. It can be very tricky. So your best bet is to find a financial advisor to guide you through the process. But we’ll cover the basics to see if it piques your interest.

For starters, it’s important to keep in mind that in order to make the most out of a backdoor Roth IRA and avoid major tax penalties, you can’t have another IRA. This covers SEP IRAs and SIMPLE IRAs.

Now here’s how it works. You open a traditional IRA and a Roth IRA at the same time, preferably with the same manager. Next, you contribute the maximum to the traditional IRA ($7,000 in 2024 or 2025). Afterward, you convert the traditional IRA to a Roth IRA and pay income taxes owed on the money. This process helps you make maximum tax-deferred contributions that grow tax-free. Finally, you can withdraw these savings tax-free when you’re eligible.

So if this option appeals to you, we recommend you consult a financial advisor to guide you through the process so you won’t run into any major pitfalls that may be hidden along the way.

4. Contribute to a Health Savings Account (HSA)

If you’re enrolled in an eligible high-deductible health plan (HDHP), you may be able to open a health savings account (HSA). These savings vehicles help Americans save for future medical expenses, which can leave you burdened with major bills.

They also offer a triple tax advantage. You fund these accounts with pre-tax dollars and your earnings grow shielded from taxes. As with 401(k) plans, you can invest these savings in securities like stocks, bonds and mutual funds. In addition, you can withdraw money from HSAs tax-free as long as they cover qualified medical expenses. So while not designed as a retirement plan, you can use these accounts to pay for health costs that you otherwise would have relied on 401(k) money to cover. In a sense, that money can keep growing in the plan.

5. Open a Taxable Account

You should still consider directing some money into taxable investments. Regardless of income, you can always open a brokerage account or invest in securities like mutual funds. You also won’t run into any contribution limits regardless of how much you earn. In addition, you’d have access to your investments as you need it.

Bottom Line

Being a highly compensated employee has a nice ring to it. This can also mean you will get a few chains put on your retirement nest egg, but thankfully you have options. You can contribute to an IRA, a Roth IRA or a Backdoor Roth IRA. Opening an HSA can also give you some tax benefits and help you save for future medical expenses. Plus, you can always invest in taxable accounts regardless of income.

Tips for Highly Compensated Employees

• Navigating the retirement planning terrain can be a hassle when you’re a highly compensated employee. With all these rules and regulations, it can get complicated, but a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you end up working with a financial advisor, we devised a checklist of the five questions to ask when choosing a financial advisor.

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