Highly compensated employees (HCEs) continue to be an elevated flight risk, making effective incentives for top talent a high priority. Employers compete on two levels — internal retention and external attraction. And both challenges require them to offer alternatives for individualized options that support near-term and long-term retirement goals.
Compensation trends, inflation concerns and a variety of other factors have increased the importance of offering distinctive executive benefit programs, regardless of employer size. Because top talent is a significant investment in the current direction and future prospects of any organization, it's critical to know and address HCEs' pain points. Strengthening the commitment of these HCEs to stay in place — and to grow where they are — minimizes potential loss, including the loss of the institutional knowledge they continue to accumulate.
Often there are tipping points in careers that prompt critical influencers to look for a new opportunity elsewhere. At these junctures, reinforcing the value they see in their rewards can help diminish or neutralize this inclination.
Incentives may have different success rates for HCEs depending on their career stage and life situation. Reward structures targeted to 65 year olds are less likely to capture the interest of younger generations whose retirement needs are less immediate. But interest in shorter-term incentives could provide a solution. Some employers are combining shorter-term incentives with longer-term incentives, such as bonus plan structures and in-service distributions, to help sustain engagement and loyalty. This approach also supports mid-career goals like saving for a vacation home or sending children to college.
How nondiscrimination testing requirements affect HCE contributions
Traditional qualified plans such as a 401(k) are set up to work for the masses. Financial advisors often suggest that individuals directly defer 10% of their income into retirement savings, but contribution limits can make it impossible for HCEs to meet that threshold because of their salary level. To help ensure that a 401(k) or any other qualified plan is beneficial for all participants, not just the highly compensated, employers are required to meet nondiscrimination testing standards. Ratios for HCE and non-HCE contribution levels typically must fall within a margin of 2%. If they don't, HCE contributions are reduced accordingly.
When non-HCEs decide not to contribute to the 401(k) plan, their 0% rate brings down the average contribution. And this factor may limit the contribution percentages permitted for HCEs. Consequently, employees who earn $150,000 or more in 2023 may not be able to reach their retirement target. This can happen even if the plan passes nondiscrimination testing and the HCE is allowed to defer the statutory maximum of $22,500 plus a $7,500 catch-up.1 While saving $30,000 per year may seem like a lot, it may leave some HCEs short of their goals.