This is more of a grievance. I have plans in which the HCEs would be able to contribute more to a Traditional IRA than they can to the 401k plan. I think the rules need to change such that an HCE should at least be able to contribute the IRA maximum limit to their 401k without concern that a portion of it is going to be refunded. Thus, lets assume the IRA limit is 4k for 2005. I have an HCE who contributed 5k and the test results indicate a refund of 3k - all EE. I say, let the HCE keep at least 4k in the plan and refund only the 1k (5k - 4k). Does anyone see a problem with that?

The reason HCE's should not be allowed to automatically contribute the IRA limit is that a 401(k) offers certain advantages over an IRA. These include creditor protection, ability to take loans, and possibly cheaper/broader investment options.

There are alternatives (safe harbor, QNEC) which would allow the HCE to contribute more to the 401(k).

Sorry to state the obvious, but don't forget the catchup if that would help.