Retirement Savings Strategies for Highly Compensated Employees

Much has been written about how Americans save and how about half do not save for retirement; however, highly compensated employees are often overlooked in this discussion because the assumption is that they will be simply fine—thank you very much.

While high-income earners have more discretionary income to save, they typically have the same goals as their lower-earning contemporaries. They want to maintain their lifestyle in retirement and handle the costs of any health conditions that may surface. They do not want to outlive their savings and become a burden to their families or society. Many would like to leave something to their kids, while others want the check to the undertaker to bounce. This article explores tailored strategies plan sponsors and employers can use to help highly compensated employees achieve financial goals to secure a more comfortable retirement.

Table of Contents

1. Social Security for Higher Earners
2. How Can Employers Help?
3. Approaches that Are Free to the Employer
4. You Get What You Pay For: Other Approaches
5. Conclusion
6. FAQs

Social Security for Highly Compensated Employees

Social Security is a double-edged sword for higher earners. In 2025, the maximum amount of earnings on which workers must pay Social Security tax is $176,100. The absolute maximum benefit in 2025 that someone who retires at age 70 can receive is $5,108 per month, and the maximum benefit at full retirement age in 2025 is $4,018 per month. To obtain that benefit, the employee would need to have paid Social Security on the maximum taxable amount for at least 35 years. Very few people max out their Social Security for that long or that early in their careers. Thus, very few people will receive the maximum available benefit. The administration has a quick Social Security calculator for a quick estimation, and Americans can log into their account to see their estimated benefits.

From a taxation perspective, let’s assume that higher earners will have more than $34,000 in income ($44,000 for a couple). In that situation, up to 85% of their Social Security Income would be taxable. This does not mean it is taxed at an 85% tax rate – a common misconception. For example, the person’s income is $40,000 in pre-tax withdrawals from their retirement account, $30,000 in consulting wages from a side gig, and $32,000 in Social Security. Their taxable income would include $27,200 (85% of $32,000) of their Social Security benefit, taxed at their regular taxation rate. Therefore, in this example, their taxable wages would be $97,200.

Roth contributions are handled differently – which can be an important difference: Assuming the money meets the 5-year aging requirement, Roth withdrawals are not considered to be earned income and, therefore, are not subject to income taxes or factored into how the individual’s Social Security benefit is taxed.

How Can Employers Help?

Because retirement plan regulations are set up to ensure that Highly Compensated Employees (as defined by the IRS) and some owners and officers of a corporation do not benefit in the aggregate by significantly more than the Non-Highly Compensated Employees, you need to ensure that what you do does not solve one problem and create another.

In essence, for defined contribution plans in 2025, anyone earning over $160,000 is considered a Highly Compensated Employee (HCE). In addition, rules around ownership, officer status, and whether the employee is a lineal relative of an owner or officer can classify the person as a Key Employee even if they make less than $160,000. Any compensation over $350,000 is not considered in any plan calculations, and the maximum contribution from all sources is $70,000.

Employers have several arrows in their quiver to help higher-paid employees save more for retirement. Some of them require additional support from your 401(k) provider’s compliance team to ensure that they make sense for your plan and your higher-paid employees. Below we will explore a variety of options for employers to support their highly compensated employees.

Approaches that Are Free to the Employer

In general, none of the following strategies will add extra employer costs (perhaps a little more in matching contributions) and are worth adding to a plan and/or educating participants about:

• Adopt the Enhanced Catch-Up Contribution Available Under SECURE 2.0: Employees between the ages of 60 and 63 can contribute an additional $3,750 in 2025 for a maximum catch-up of $11,250. Employers will need to work with the payroll and retirement plan provider to implement this feature.
• Leverage Roth Contributions: For younger employees, saving for retirement via Roth contributions is typically a no-brainer. While they miss out on the tax break today, the amount of time they have for their money to compound typically means that the tax-free earnings are a much more significant chunk of their retirement than their taxable contributions.
  • Example: John saves $23,500 into the 410(k) plan at age 30 at an average 7% rate of return over the next 40 years. His money doubles roughly every 10 years. That means that the $23,500 basis turns into $350,000 in 40 years, and his basis is about 15% of that. All that growth is tax-free in retirement. For older employees, it is a value judgment: How long will it be before they need the money? Some employees want to retire early and use Roth savings in those early years due to the tax benefits; others want to use their pre-tax savings earlier in their retirement. These considerations should be discussed with a financial planner and tax advisor.
  • No RMDs:  One of the big benefits of Roth savings is that if the first dollar deposited into the Roth account within the 401(k)/403(b) was more than five years ago, the Roth assets are not subject to Required Minimum Distributions (RMDs).
• “Mega-Roth” Contributions: Mega-Roth contributions are after-tax contributions that employees make to the plan and then immediately convert to Roth within the plan. Doing so has no tax implications for them and no financial impact on an organization. To add this feature, there are a few things needed:
  • Make sure the organization understands the pros and cons of this strategy.
  • If a plan is close to top-heavy and this would primarily benefit key employees, forget it. It’s advisable to always keep a plan from being top-heavy (Top-heavy means that Key Employees hold 60% or more of the assets in the plan.)
  • Work with the plan’s Compliance team to ensure that the amount that the employees who want to save this way is worth the hassle. Specific testing rules that apply to this approach can make it less attractive.
  • Amend the plan to allow for after-tax contributions and in-plan Roth conversion if the plan doesn’t already have those features
• In-Plan Roth Conversions: Some higher earners may choose to convert part of their current balance from pre-tax dollars to Roth. Generally, we see most of this activity when the markets are sharply down, because the participants can then ride the upswing with the gains all being Roth. The converted amount is considered income in the year of the conversion, so the employee must have the ready cash to cover that tax burden. An employer would need to amend the plan to allow for this if the plan currently does not.
• Offer a High-Deductible Health Plan (HDHP) and a Health Savings Account (HSA): If you already offer this option, then this strategy is no additional cost to the employer. Outside of the retirement plan, one of the best tools higher-paid employees can use is an HDHP paired with an HSA. While everyone can benefit from using an HSA, highly paid workers can probably benefit the most. HSA contribution limits for 2025 are $4,300 for individuals, $8,550 for family, and a $1,000 catch-up contribution for age 55 or older. HSAs are triple-tax advantaged, meaning the money is tax-free when deposited, it grows tax-free, and it is tax-free when used for health care expenses – including COBRA premiums. This last feature is a significant benefit over a pre-tax 401(k) contribution. Assuming the participant contributes enough to the retirement plan to maximize any matching contribution, this would be the next best place to save for retirement. It also fits in beautifully for a strategy where the employee might want to retire 18 months before their 65th birthday when they become eligible for Medicare. When a person puts money into an HSA, the use-it-or-lose-it feature associated with FSA plans is not a factor. That person owns the HSA, a personal account that moves with them if they leave their employer. It is natural to assume that higher-paid employees have the savings to handle a health emergency and would be able to cover up to the out-of-pocket maximum. If true, they can pay their medical bills out of current available assets and leave their HSA alone to grow until retirement. Why put money into a pre-tax account and not use it for eligible expenses? In the US, health care is wealth care because it is breathtakingly expensive. Most recent estimates show that a married couple can expect their health care spending to be over $400,000 in retirement—and the 75th percentile is over $750,000. HSA money, with its triple-tax advantage, helps to ease that financial burden.
• Educate Employees About IRAs. Many employees assume they cannot contribute to an IRA and a 401(k) in the same year. That is not true. What is true is that they most likely would not get an IRA deduction. According to the IRS, just over 11% of Americans itemize deductions, so most people would not get to take that deduction anyway. Essentially, the same discussions come into play about pre-tax vs. Roth in an IRA as in a 401(k), but some differences can be material. Participants interested in contributing to an IRA should also consult their tax advisor. One way that employers can help is by making a direct deposit into the employee’s IRA account.

You Get What You Pay For: Other Approaches

Several additional strategies employers can use are not free but may be extremely valuable, especially if the higher-paid employees are owners who want to maximize their own benefits. Remember, all the contributions discussed in the strategies below are tax-deductible to the employer.

• Add a Safe Harbor Matching Contribution: This works great for plans that fail nondiscrimination testing and must return money to Highly Compensated Employees. With a Safe Harbor Match in place, the Plan is no longer subject to nondiscrimination testing. There are various Safe Harbor match arrangements. The most common are:
  • Regular: 100% match on the first 3% contributed, 50% on the next 2%, and 100% immediately vested. The maximum employer outlay is 4% of pay.
  • QACA Safe Harbor: 100% match on the first percent contributed, then 50% on the next 5%. The maximum employer outlay is 3.5% of pay. This typically works well for organizations with high turnover because the vesting requirement is 0% until 2 years of service, then 100% fully vested.
• Add a Safe Harbor Non-Elective Contribution (SHNE): With an SHNE, the employer must contribute 3% of pay to all eligible non-highly compensated employees whether or not they contribute to the plan. This solves two problems and opens up an opportunity: The nondiscrimination testing headaches go away, and if the plan is top-heavy, this contribution also satisfies the Top-Heavy Contribution requirements. Employers can also set up the contribution as a discretionary Safe Harbor Maybe and determine from year to year whether they are going to contribute at all and whether they are going to declare it as a Safe Harbor contribution or not. If the employer does not make it as a Safe Harbor contribution, any NDT testing failures and/or Top-Heavy contributions will apply. The opportunity created with the SHNE is that the employer can contribute up to an additional 6% for any individual(s) to the plan through a Profit Sharing Plan (PSP) provision. If the plan does not have a PSP component, it would need to be adopted.
• Supercharge your Safe Harbor Non-Elective (SHNE) Contribution: In addition to the information shared above on SHNEs, if employers really want to maximize the savings opportunities for higher-paid workers and/or key employees, they can do so – at a price. This magic happens when the employer makes the SHNE contribution and also contributes an additional 2% to the Profit Sharing Plan for all eligible non-highly-compensated employees, for a total contribution of 5%. The employer could then contribute up to an additional 15% to HCEs.
  • This approach is subject to a special kind of nondiscrimination testing and does not work for everyone. The older the employees are for whom the employer wants to maximize the benefits, the better. The two general approaches we see employers take toward this type of plan are “Tell us how much we need to contribute to maximize the benefits for employees A, B, and C,” or “Our budget is X. Make the largest contributions possible for these four employees and allocate the money as needed for us to pass testing.”
  • With some additional fine-tuning on the testing, the employer can typically contribute enough to the Profit Sharing Plan for certain employees to receive the maximum benefit of $70,000 (in 2025). The calculations are based on factors such as their compensation and age in relation to the other employees. The $70,000 annual additions limit includes the employee’s contributions plus any other employer contributions.
  • The benefit of contributing all the money through the Profit Sharing Plan rather than SHNE for the HCEs is that the Profit Sharing contributions can have a vesting schedule attached, where the SHNE is 100% immediately vested. If you are interested in exploring this option, we recommend you contact Navia for further information on Cross-Tested plans.

• Set up an Executive Non-Qualified Deferred Compensation (NQDC) Plan: Some employers choose to reward executives by sponsoring an NQDC Plan alongside their qualified plans. These NQDCs allow employees to defer a significant portion of their income to the future – generally for post-retirement. Essentially, this enables employees to smooth their income stream between now and the future by telling the employer, “Do not pay me this 25% of my income now. Pay it to me starting in 15 years, over a period of 2 years.” There are pros and cons to this approach. Employers can contribute to NQDC plans. The plans are not subject to the same nondiscrimination restrictions as Qualified Plans and have quite a bit of design flexibility. Although they are not qualified plans, they are still regulated. For the participant, the biggest downside is that the money they have deferred to the future is considered a general employer asset and is subject to creditors. Navia currently manages many NQDC and 457(b) plans and can help you determine whether this approach is right for you.

Conclusion

One of the best aspects of designing strategies for highly compensated employees is that they have money to work with, which almost always indicates choices. From a regulatory standpoint, setting a path forward for employers to reward these employees and keep them in the fold can be complicated. Employers will need expert guidance on the best approach. Navia’s retirement consulting team is here to help craft the best solutions for employers and their valuable team.

FAQs

1:  How much Social Security can highly compensated employees expect to receive?

The maximum Social Security benefit for someone retiring at age 70 in 2025 is $5,108 per month, while the maximum benefit at full retirement age is $4,018. However, very few people qualify for the maximum benefit because they must have paid Social Security tax on the maximum taxable earnings ($176,100 in 2025) for at least 35 years. Additionally, up to 85% of Social Security benefits may be taxable if total income exceeds $34,000 for individuals or $44,000 for couples.

2:  What are the best retirement savings strategies for highly compensated employees?

Some of the best strategies include maximizing contributions to a 401(k), utilizing Roth contributions for tax-free growth, making after-tax “Mega-Roth” contributions (if allowed by the plan), and taking advantage of in-plan Roth conversions. Employers may also offer options like Non-Qualified Deferred Compensation (NQDC) plans or Profit Sharing Plans to help highly paid employees save more.

3:  What is the benefit of using a Health Savings Account (HSA) for retirement?

An HSA offers triple-tax advantages: contributions are tax-free, investments grow tax-free, and withdrawals for qualified medical expenses are also tax-free. This makes it an excellent savings vehicle, especially for Highly Compensated Employees who can probably afford to pay current medical expenses out-of-pocket and allow their HSA funds to grow for future healthcare costs, which may exceed $400,000 in retirement.

4:  How can employers help highly compensated employees save more for retirement?

Employers can implement strategies such as offering Roth 401(k) contributions, allowing for after-tax “Mega-Roth” contributions, providing Safe Harbor Matching Contributions, or setting up a Non-Qualified Deferred Compensation (NQDC) plan. Employers should work closely with their 401(k) provider’s compliance team to ensure these strategies align with nondiscrimination testing rules.

5:  What is the maximum 401(k) contribution limit for highly compensated employees in 2025?

The total contribution limit (including employee and employer contributions) is $70,000 in 2025. However, employee deferrals are limited to $23,500, with an additional $7,500 catch-up contribution for those aged 50 and older. Contributions are subject to nondiscrimination testing, which may limit contributions for highly compensated employees unless the employer adopts strategies like Safe Harbor contributions.

 

 

Navia and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice, and Navia may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state, or local; and/or its application to the clients’ business activities.