Non-qualified Savings Plan vs. 401(k) for Highly Compensated Employee
"401k plans are required to not discriminate against the non-HCE participants, and one way they achieve this is by limiting the percentage of wages that HCEs can contribute to the plan to the average annual percentage contribution by the non-HCE participants or 3% whichever is higher.  If most non-HCE employees contribute only 3% (usually to capture the employer match but no more),  then the HCEs are stuck with 3%. However, be aware that in companies that award year-end bonuses to all employees, many non-HCEs contribute part of their bonuses to their 401k plans, and so the average annual percentage can rise above 3% at the end of year. Some payroll offices have been known to ask all those who have not already maxed out their 401k contribution  for the year (yes, it is possible to do this even while contributing only 3% if you are not just a HCE but a VHCE) whether they want to contribute the usual 3%, or a higher percentage, or to contribute the maximum possible under the nondiscrimination rules. So, you might be able to contribute more than 3% if the non-HCEs put in more money at the end of the year. With regard to NQSPs, you pretty much have their properties pegged correctly. That money is considered to be deferred compensation and so you pay taxes on it only when you receive it upon leaving employment. The company also gets to deduct it as a business expense when the money is paid out, and as you said, it is not money that is segregated as a 401k plan is. On the other hand, you have earned the money already: it is just that the company is ""holding"" it for you. Is it paying you interest on the money (accumulating in the NQSP, not paid out in cash or taxable income to you)?  Would it be better to just take the money right now, pay taxes on it, and invest it yourself? Some deferred compensation plans work as follows. The deferred compensation is given to you as a loan in the year it is  earned, and you pay only interest on the principal each year. Since  the money is a loan, there is no tax of any kind due on the money when you receive it. Now you can invest the proceeds of this loan and hopefully earn enough to cover the interest  payments due. (The interest you pay is deductible on Schedule A as an Investment Interest Expense).  When employment ceases,  you repay the loan to the company as a lump sum or in five or ten annual installments, whatever was agreed to, while the company pays you your deferred compensation less taxes withheld. The net effect is that you pay the company the  taxes due on the money, and the company sends this on to the various tax authorities as money withheld from wages paid.  The advantage is that you do not need to worry  about what happens to your money if the company fails; you have received it up front.  Yes, you have to pay the loan principal to the company but the company also owes you exactly that much money as unpaid wages. In the best of all worlds, things will proceed smoothly, but if not, it is better to be in this Mexican standoff rather than standing in line in bankruptcy court and hoping to get pennies on the dollar for your work." "Also, in (5), is it considered unpaid wages? Because that's pretty high on the bankruptcy hierarchy.  No. It is near the bottom, in with unsecured debt. If you have access to the plan documents, see if the plan has the phrase ""rabbi trust"" anywhere in it. This means that the money is not kept comingled with the corporation's regular accounts, but is rather deposited with a financial institution (such as Fidelity)."
"Highly Compensated Employee Rules Aim to Make 401k's Fair would be the piece that I suspect you are missing here.  I remember hearing of this rule when I worked in the US and can understand why it exists.  A key quote from the article: You wouldn't think the prospect of getting money from an employer   would be nerve-wracking. But those jittery co-workers are highly   compensated employees (HCEs) concerned that they will receive a refund   of excess 401k contributions because their plan failed its   discrimination test. A refund means they will owe more income tax for   the current tax year. Geersk (a pseudonym), who is also an HCE, is in   information services and manages the computers that process his firm's   401k plan. 401(k) - Wikipedia reference on this:  To help ensure that companies extend their 401(k) plans to low-paid   employees, an IRS rule limits the maximum deferral by the company's   ""highly compensated"" employees, based on the average deferral by the   company's non-highly compensated employees. If the less compensated   employees are allowed to save more for retirement, then the executives   are allowed to save more for retirement. This provision is enforced   via ""non-discrimination testing"". Non-discrimination testing takes the   deferral rates of ""highly compensated employees"" (HCEs) and compares   them to non-highly compensated employees (NHCEs). An HCE in 2008 is   defined as an employee with compensation of greater than $100,000 in   2007 or an employee that owned more than 5% of the business at any   time during the year or the preceding year.[13] In addition to the   $100,000 limit for determining HCEs, employers can elect to limit the   top-paid group of employees to the top 20% of employees ranked by   compensation.[13] That is for plans whose first day of the plan year   is in calendar year 2007, we look to each employee's prior year gross   compensation (also known as 'Medicare wages') and those who earned   more than $100,000 are HCEs. Most testing done now in 2009 will be for   the 2008 plan year and compare employees' 2007 plan year gross   compensation to the $100,000 threshold for 2007 to determine who is   HCE and who is a NHCE. The threshold was $110,000 in 2010 and it did   not change for 2011. The average deferral percentage (ADP) of all HCEs, as a group, can be   no more than 2 percentage points greater (or 125% of, whichever is   more) than the NHCEs, as a group. This is known as the ADP test. When   a plan fails the ADP test, it essentially has two options to come into   compliance. It can have a return of excess done to the HCEs to bring   their ADP to a lower, passing, level. Or it can process a ""qualified   non-elective contribution"" (QNEC) to some or all of the NHCEs to raise   their ADP to a passing level. The return of excess requires the plan   to send a taxable distribution to the HCEs (or reclassify regular   contributions as catch-up contributions subject to the annual catch-up   limit for those HCEs over 50) by March 15 of the year following the   failed test. A QNEC must be an immediately vested contribution. The annual contribution percentage (ACP) test is similarly performed   but also includes employer matching and employee after-tax   contributions. ACPs do not use the simple 2% threshold, and include   other provisions which can allow the plan to ""shift"" excess passing   rates from the ADP over to the ACP. A failed ACP test is likewise   addressed through return of excess, or a QNEC or qualified match   (QMAC). There are a number of ""safe harbor"" provisions that can allow a   company to be exempted from the ADP test. This includes making a ""safe   harbor"" employer contribution to employees' accounts. Safe harbor   contributions can take the form of a match (generally totaling 4% of   pay) or a non-elective profit sharing (totaling 3% of pay). Safe   harbor 401(k) contributions must be 100% vested at all times with   immediate eligibility for employees. There are other administrative   requirements within the safe harbor, such as requiring the employer to   notify all eligible employees of the opportunity to participate in the   plan, and restricting the employer from suspending participants for   any reason other than due to a hardship withdrawal." "Yes, it can be done.  See ""Scenario 4"" at Isolating 401(k) basis - Fairmark.com.  Though that article is primarily about getting after-tax 401(k) money into a Roth IRA, Scenario 4 applies to the scenario you are asking about. At a high level you do exactly what you say -- transfer the pre-tax money from your trad IRAs to a 401(k) (btw, a solo 401(k) will work for this also -- doesn't have to be your employer's -- but then you need to be eligible to set up a solo 401(k)).  This is allowed because qualified plans can't accept after after-tax traditional IRA money, so the transfer overrides the usual pro rata rules and ""strains"" the basis out and leaves it in the trad IRA.   However, there's a mismatch between the intent of Congress (as indicated by the Joint Committee on Taxation report on the law) and the actual text of the law as detailed in the Fairmark article which while it doesn't stop you from doing this adds a couple of hoops to jump through if you want to be in total compliance with the law." 401(k)'s can be rolled over into IRAs. You can roll all of your former company 401(k)'s into a single IRA, managed by whatever company you like. Many employers will not let you transfer money out of your 401(k) while you're still a current employee, though, so you may be stuck with the 401(k) used by your current company until you leave. You'll have to check with your 401(k) administrator to be sure. You won't incur any taxes as long as you execute the rollovers properly. The best way to do it is to coordinate the transfer directly between your old 401(k) and your new IRA, so the check is never sent directly to you. "401(k) doesn't have a ""return rate"", because 401(k) is not a type of investment -- it is a vehicle for investment, with certain tax treatments. Just like your money that's not in a 401(k), you can invest it in either the bank, a CD, stocks, mutual funds, bonds, etc., you can similarly (depending on the options given to you by your 401(k) plan) invest the money in the 401(k) in a cash account, buy stocks, mutual funds, etc. Your return is dependent on how you invest your money, not whether it's in a 401(k) or not. Whether it's in a (Roth or Traditional) 401(k) simply affects when and how it gets taxed. (It is true that most 401(k) plans offer little variety in types of investments you can choose; however, this is not a big deal, as chances are that in a few years, you will leave your company, at which point you are able to rollover the 401(k) into an IRA, at which point you will have many, many options for how to invest it.) To make a valid comparison, you should be comparing the same type of investment in both cases. That means, you should assume the same return for both the money outside the 401(k), and the money inside the 401(k), and only consider the taxes and penalties (if you plan to withdraw early)." If it were my money, I wouldn't put it in a 401(k) for this purpose. If you were working at a company that provided 401(k) matching, then it might be worth it to put the money in your employer's 401(k) because the employer chips in based on what you put in. But you're self-employed, so there's no matching unless you match it yourself.  (Correct?) So, given that there's no matching, a 401(k) arrangement would have more restrictions than a non-tax-advantaged account (like a bank account, or a taxable money market account).  This would be taxable in the year you earn the money, but then that's it. If you're expecting to pull out the money pre-retirement, I wouldn't put it in in the first place. US corporations are allowed to automatically enter employees into a 401K plan.  A basic automatic enrollment 401(k) plan must state that employees   will be automatically enrolled in the plan unless they elect otherwise   and must specify the percentage of an employee's wages that will be   automatically deducted from each paycheck for contribution to the   plan. The document must also explain that employees have the right to   elect not to have salary deferrals withheld or to elect a different   percentage to be withheld. An eligible automatic contribution arrangement (EACA) is similar to   the basic automatic enrollment plan but has specific notice   requirements. An EACA can allow automatically enrolled participants to   withdraw their contributions within 30 to 90 days of the first   contribution. A qualified automatic contribution arrangement (QACA) is a type of   automatic enrollment 401(k) plan that automatically passes certain   kinds of annual required testing. The plan must include certain   features, such as a fixed schedule of automatic employee   contributions, employer contributions, a special vesting schedule, and   specific notice requirements. You generally have a period of time to stop the first deposit. One I saw recently gave new employees to the first paycheck after the 60 day mark to refuse to join. You also may be able to get back the first deposit if you really don't want to join. If you don't want to participate look on the corporate website or the Fidelity website to set your future contributions to 0% of your paycheck. Keep in mind several things: Personally I'm against any type of government sponsored investments or   savings. I can save money on my own and I don't care about their   benefits. Some companies provide an annual  contribution to all employees regardless of participation in the 401K. They do need to establish an account to do that. Again that is free money Does it mean if I never contribute any money so I will have 0 I might   go below 0 and owe them money in case they bankrupt or do bad   investments? Even in total market collapse the value of the 401K could never go below zero, unless the 401K was setup to allow very exotic investments. Young vs old doesn't really make a difference.  What's in play in the Roth/After Tax vs Traditional/Pretax decision is your current marginal tax bracket versus your probable taxation in retirement.   Since your company matches something on the pretax account it makes sense to max out the pretax contribution match amount before considering roth contributions.  If the match is something like 50% of your contribution up to 3% of your salary, that's an instant 50% return on your contribution and you can't really beat that. "First of all, one thing that is very important: Match is always better than no match.  So, you should definitely use that match on your HSA if you've already maxed out the company match on your 401(k).  In fact, for most people there won't be much reason to invest in your 401(k) above the company match at all. If, for example, your company matches only up to 5%, and you want to invest 15% of income into retirement, you ought to open an IRA instead (Roth or standard depending on your situation) and put the extra 10% in there. Beyond that, you're right, HSA's (the accounts themselves) have all the benefits of a 401(k).  I wouldn't invest there for retirement instead an IRA, though.  There is just no reason. The only built-in downside of an HSA is the HDHP attachment, which may be undesirable to some employees or in certain situations. If you want to get down to raw dollar figures and your company is offering both a standard health plan and a HDHP+HSA, the calculation will be dependent on the premiums and benefits of each and your projected costs of your health care (which is always a crystal ball estimation anyway).  Those costs and benefits can vary wildly, from a completely obvious choice on either the HDHP or standard plan, or pretty much a wash where you decide based on your comfort level with a high deductible. To illustrate... Standard plan: Your company might offer a standard plan that costs you $100 out of pocket for an individual.  That means you pay a minimum of $1200 a year for health care.  Most plans will have copays (a flat amount like $15 you pay for standard doctor consultations), a deductible (you pay 100% of fees up to this, co-pays don't count), a percentage you pay beyond the deductible (20% is typical), and a maximum (like $1000 per individual per year - beyond this, up to a ""lifetime"" maximum benefit of like $2 million, you won't be charged anything). In a standard plan where you have no expenses, you might pay $1200 a year plus a couple co-pays, for a total of $1230.  In a bad year with surgery, you might max out, so $1200 + $30 + $1000 = $2230. HDHP/HSA: These plans are very different.  You might still pay a premium, I.E. $30 a month.  They will still have a deductible and maximum, but they might be the same amount.  You will probably not have copays (I didn't when I had one, but I could be wrong), which means a standard doctor visit will cost more like $80-100. In a good year, this will mean that you pocket $500 from your company, but pay back $360 in premiums.  A couple doctor visits would mean there's only $300 left in your account at the end of the year.  But, that's still a net cost of only $60, compared to $1230.  Big win! In a bad year, you would end up out of pocket the max (say $2000) plus premiums, minus the $500, for a total of $1860.  In this case, still better than the standard plan. The important difference will come in an in-between year.  You will reach the max quicker on an HDHP than you will on a standard plan.  With a family, where all of these numbers are higher, and you have more people to be getting sick/injured this might make the standard plan a better benefit. However, since whatever you build up in an HSA account stays with you forever, while you're single and have only your own health to be concerned about, that is probably a good choice.  When you have a family, things might change and you switch to a standard plan, but you still have that war-chest to offset copays and hospital visits in future years. I was forced onto an HSA for 2 years with a smaller company.  They had a really good contribution, $2500 if I remember right, and we saved up big time. Later, when my wife was pregnant, we were on a low-deductible standard plan and paid all our fees out of the HSA.  It worked out great. I say, as long as the averaged yearly expected costs make sense after doing calculations illustrated above, go for it!"