Discrimination Tests & HCE definitions

[pmacduff]

I wanted to post this for anyone out there who thinks us experienced "pensioners" can't get boggled by something easy...

I have a client with two employees who were HCEs in 2002 (by their comp in 2001; both made somewhere in the $90,000 range - over the $85,000 limit). In 2002, these participants both made EXACTLY $90,000. I was preparing the June 30th, 2003 semi-annual valuation report. (I always run prelimiinary ADP/ACP tests on clients with testing issues to get an idea where the Plan stands.) Lo & behold, my Relius software knew, but I wasn't thinking, that the definition states (see below)"...compensation from the employer IN EXCESS of $80,000..." (indexed, of course). Well, the software had moved these gentlemen into the non-highly compensated category for my preliminary 2003 testing. Imagine my frustration thinking that the software was doing things it shouldn't and affecting my testing!!!!! Until I checked the code carefully, I couldn't imagine what could be happening. Wording can be everything

DIRECT FROM THE CODE:

The term "highly compensated employee'' means any employee

who--

(A) was a 5-percent owner at any time during the year or the

preceding year, or

(B) for the preceding year--

(i) had compensation from the employer in excess of

$80,000, and

(ii) if the employer elects the application of this

clause for such preceding year, was in the top-paid group of

employees for such preceding year.

Hope someone can get a chuckle.............

[WDIK]

I guess that is like someone who owns 5% of a corporation NOT being a 5% owner because the definition requires them to own more than 5%.

[Guest elirpa]

Speaking of HCE determination..... I have a situation where I had a short plan year for 2002 that went from February to December. An employee was hired in 2002 towards the end of May whom earned $98,000. When I initially ran projections in Relius, this participant was listed as a NHCE and did not show up as an HCE in Relius for 2003. While I was checking prior year compensation I discovered this participants level of compensation during 2002. This employee entered the plan in July of this year, and is a participant in the plan. Because he earned over $90,000 in 2002 he is considered an HCE, and because he entered the plan in July half year compensation will be used for the ADP/ACP test which puts his deferral percentage at 20%, which causes my HCE's to fail ADP/ACP testing.

I think I already know the answer, but does anyone know if there is a way to keep the participant from being classified as a HCE? They did not elect the Top Paid Group in their document, and it is too late to amend the plan for this situation now. Is Relius correct, or am I bonkers to think that this particpant should be classified as an HCE?

Thanks,

[Tom Poje]

what does your document say? for example

the old Corbel document would say 414(s) comp is from date of participation

the new language says any definition that satisfies 414(s)

414(s) is testing comp not allocation comp.

there is no requirement to use comp from date of participation as long as you are consistent with everybody. You can even vary from year to year, but if you are using prior year testing you still have to be consistent.

Again, it depends on your document

[R. Butler]

Tom,

Are you saying that there is a way elirpa can keep that employee from being classified as an HCE?

If so, how do you arrive at that conclusion? Are you saying that you can exclude compensation prior to participation for HCE determination purposes?

I am confused about what you are saying.

[Tom Poje]

no, ee is an HCE, but what I was saying is instead of using half year comp in testing, use full year, thus ee drops from 20% to 10%.

see also ERISA Outline Book 11.66 (2003 edition) Section 414(s) comp may be limited to period ee is eligible but it is not mandatory. (But then treat NHCEs the same)

again, the document decides. if it says use date of participation then too bad.

[R. Butler]

I see said the Blind Man.

[Blinky the 3-eyed Fish]

They did not elect the Top Paid Group in their document, and it is too late to amend the plan for this situation now.

Actually, it's a point of debate as to the timing of when you can amend for this. Are there any cutback issues if this person's status was changed to NHCE by amending the plan to have the top paid election?

[Guest elirpa]

No, it is a new comparability plan, so this person would get the same contribution regardless. The only problem that I have is failing ADP/ACP testing.

[Guest CAM223]

So, there is really no good answer as to whether or not you can amend a plan after the plan year to change the hce definition to include the top paid group only? It's Jan., 2004 and we have a calendar year plan--what about an amendment now?