HCE and Key Employee Question?

[Guest KD40]

I have a plan which an employee was an owner in the year 2000. He sold his ownership in year 2000 and also terminated in that year as well. He also has a wife that still works with the company, but did not make over 85K in the year 2000. I am trying to complete testing for the 1/1/01 - 12/31/01 period. My questions are:

1. Is he still considered a Key EE, since he still has a balance in the plan?

2. Should his wife still be considered a HCE due to her relationship to an owner, or what was a former owner?

[kocak]

An employee is an HCE in 2001 if they are a more than 5% owner in 2001 or 2000. Therefore, he and his wife are both HCE in 2001. But, since he terminated in 2000, he won't be included in your testing.

For Key determination, are you looking to see if they are top heavy in 2001 or 2002? Normally when I am doing the 2001 work, I am looking to see if they are top heavy in 2002.

If your determination date is 12/31/01, you would only include employees with an hour of service in 2001, so he would not be included in your top heavy testing.

mck

[Guest KD40]

Thanks for the response.

I am completing the TH for year 2002, so my determination date is 12/31/2001. Base on your response, he would not be part of the TH test, but would his wife?

Based on your answer for HCE status, I would say yes for her. Do you agree?

[Archimage]

You will have to include his distributed amount and the wife's balance in your top heavy test for the 2001 plan year. You would not use either of them for the 2002 plan year.

How can you be completing top heavy testing for the 2002 plan year when the plan year is not even complete?

[Guest KD40]

Our company does TH for the following plan year. Someone started that a few years ago around here and they have stuck with that way ever since. Therefore, if the plan year is 12/31/01, we test for TH with a determination date of 1/1/02.

Thanks for your response.

[kocak]

If you are looking at top heavy for 2002, your determination date is 12/31/01. You start with looking at employees who had an hour of service in the year ending on the determination date. Therefore, the owner's balance and/or distribution are disregarded for the 2002 top heavy test, since he did not have an hour of service in 2001.

Re. the key employee determination, again, for a determination date of 12/31/01 the lookback period is the one year period containing the determination date. Therefore, the wife would not be a key employee (not a more than 5% owner, not an officer earning more than $130,000, not a more than 1% owner earning more than $150,000).

Note however, she is probably a FORMER key employee. You'd have to check your tests for prior years, but since she was a more than 5% owner in 2000, she was a key. Remember former key account balances are also disregarded for top heavy testing.

Re. the order of compliance testing. Top heavy is always the first and the last thing I look at in compliance testing. When doing a 2001 plan, I first look at the top heavy test for 2001 (determination date 12/31/00). This tells me if I am top heavy for the plan year I am working on. I'll then know if I have vesting/minimum accrual issues, etc. Once the valuation is completed and all my other compliance testing is done, the last thing I look at is top heavy for the next year. I have information as of 12/31/01 so I can tell if I am top heavy for the 2002 plan year.

mck