If an active non-owner participant has exceeded the HCE compensation level for 2002-2004, but earns $80,000 for 2005, is that participant a HCE for 2006?? Thanks.

No.

Yes, he's an HCE for 2003, 2004, and 2005 and may be one of the 25 highest-paid employees for purposes of the Code of Federal Regulations (CFR) 1.401(a)(4)-5(b)(3) that restricts lump sums for highly
compensated employees (HCEs) or the top 25 when funding ratios are less than 110 percent.

The participant is not an HCE for 2006.

Is it a calendar year plan? If not, be careful...

I ask because I've been seeing a lot of non-calendar year plans lately, so I'm jumpy on these types of questions.

Thank you for the responses. One of whcih brings me to my next question regarding restricted HCEs. It seems there is a window of opportunity for a restricted employee to recieve reduced compensation in the year prior to termination/retirement/distribution to take them out of HCE status so they can receive a lump sum. Is this considered an acceptable loophole? I don't think the intent was for the 110% test to be circumvented. I'm not sure if this is something that needs to be discussed when a restricted employee is thinking about retiring and taking a lump sum. Any thoughts would be appreciated. Thanks.

It's always been my understanding that the Top 25 HCEs includes current and former HCEs. So I don't see the point of reducing compensation in the year before retirement. Rather it makes more sense to raise other employees compensation to bump the former HCE off the top 25 list.