Effect of Top-Paid Group Election on Restricted Employee Determination

[Guest merlin]

What is the effect fo the top-paid group electionon the determination of who is a restricted employee? I have a plan the uses the top-paid group election which results in Employees #1-8 being HCEs.Employee #9 would be an HCE but for the election,and she's the one who's leaving. The plan will not meet any of the exceptions of 1.401(a)(4)-5(B)(3)(iv).Is she restricted or not?I think not. Am I right?

[mwyatt]

Question: was she ever classified as a HCE in any prior year? From Reg 1.401(a(4)-5(B)(3)(ii):

Restricted Employee Defined. For purposes of this paragraph (B), the term restricted employee generally means an HCE or former HCE. However, an HCE or former HCE need not be treated as a restricted employee in the current year if the HCE or former HCE is not one of the 25 (or a larger number chosen by the employer) nonexcludable employees and former employees of the employer with the largest amount of compensation in the current or any prior year. Plan provisions defining or altering this group can be amended at any time without violating Section 411(d)(6).

Your client has elected to use the "top 20" provision in determining the HCEs for the year, which is certainly valid; I don't think that the fact that she would have been a HCE if the provision was not used would force her into the restricted employee definition. I'd make sure, however, that she never was a HCE in the past as the definition is historical in nature, not just for the year of distribution.

[Guest merlin]

mwyatt-thanks for the response. This is a takeover case for us and we're still accumulating back data. I'll check into it. Thanks again.