IRS 2026 HCE avoidance (working for small company)

Forum|Forum|3 months ago
March 4, 2026
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I was cursed last year with the HCE designation from the >$155K (income in 2024) working for a small company and going thru hades to figure out how to avoid this again for next year. So far, looks like I got lucky in 2025 by reducing my hours down to 30-39hrs week but reading about this could change to my disadvantage at any time.

This year I need to avoid the $160K HCE limit (last year’s 2025 Box 12 code D was $8657.37 & likely will be my company matched funds of pre-tax dollars for 2026), my question is how much can I earn this year if I know ~$9k will be my company matched funds of pre-tax dollars for 2026? Is it my total salary? (note: nothing will go to 401k as a tax write off, although I do have my entire income going straight into ROTH up to this year’s maximum $80K limit).

One last note, this year I will strategically continue to convert my IRA to ROTH (cIRA2Roth) at 24%-37% MFJ taxes, as well as next year (but likely keep it below ~$200k to avoid IRMA 2+ years from then) which results in me not only avoiding RMD, but keeps me in 0% LTCG if I can keep that amount below $20K a year)

My moto is "He who dies paying Uncle Sam the least tax percentage, WINS!"

Best answer by RobertB4444

On your W2 you should have an amount in box 1 that is smaller than the amount in box 3 and 5. Box 3 and 5 is your social security and medicare taxable wages which is your salary plus the deductible contributions and expenses. The amount in box 3 and 5 should be the amount that you're looking for to determine if you are a Highly Compensated Employee.

In addition, you should check with your employer to see how they define an HCE - there are differences between employers as to how this may be done.

@howjltx

[Edited 03/16/26 11:30 AM PST]

howjltxAuthor

Level 4

Trying to avoid IRS labeling me an HCE again like in 2024 (last year was restricted from contributing to my ROTH 401K)

I asked my company and they did not have a clue, likely because they let Fidelity manages the 401K.

What is shown below is the top part of my W-2 form (replaced actual $ amounts with ####.##)

Followed by my last paycheck stub for 2025, I know the total needs to stay below $160k, worked less hours last year to avoid HCE for this year, but left a lot of money on the table, so want to calculate my salary for this year more accurately.

AI states how to add this up (I only believe AI 70% of the time, I see errors here added as underlined)

1. Start with Gross Salary (W-2 Box 1😞 Take your 2025 W-2 taxable wages.

2. Add back 401(k) contributions: Add back any money you contributed to a 401(k) (as this is included in HCE definitions). Not quite correct, you only add back in the Pre-tax (BEFORE TAX DEDDUCTIONS)

3. Add back pre-tax benefits: Add back salary reductions for medical, dental, or FSA (Cafeteria Plan contributions). Again, only add back in Pre-tax (BEFORE TAX DEDDUCTIONS

4. Exclude Company Match: Do not include any 401(k) match or profit-sharing contributions made by your employer. (these are labeled as “EMPLOYER PAID BENEFITS BELOW”, I think?

5. Result: If this total exceeds $160,000 (for 2025 look-back to 2026 HCE status), you are an HCE.

Two questions below
1.) My HCE being <$160k is these two numbers added together? (green)

2.) Not the same amount due to my 401k pretax contribution? (red):
Sorry for having to split the image up to post it here.......