top paid group election

[PensionNewbee]

If I have several more than 5% owners who earned less than the HCE dollar threshold in the lookback year, and I want to apply the top paid group election, I believe the owners are still HCEs. If I have nine HCEs by ownership and compensation, and I have 23 total employees, what is the # I include in the top paid group?

[Archimage]

You will include all >5% owners. You will also include the top 4-5 (depending on how you round) wage earners.

[PensionNewbee]

so, the three owners PLUS the 5 top earners for a total of 8?

[Brian Gallagher]

ALL 5% owners are always included (provided they are eligible for the plan!). If it turns out that they are the top wages earners then you are out of luck. Sound like you are out of luck already, since all nine will be counted.

[PensionNewbee]

Someone told me that I didn't have to include 5% owners in the top paid group if their compensation would knock them out of the group, but as I understand what I'm being told here, there are actually two tests to determine HCEs - the ownership test AND the compensation test. I know that >5% owners are always HCEs, but the person had me almost persuaded that the top paid group election trumped that. So, for small groups, it won't always help to invoke the top paid group. I guess that about sums it up.

[Archimage]

That is correct. That someone you are referring to doesn't know what he/she is talking about.

[jquazza]

One more thing, about the rounding, you always have to round up. if your 20% count is 4.1, you have to include 5 individuals as your HCEs.

[PensionNewbee]

OK, just in case I have to fight against raging skepticism, where can I find this information written down? Code/Regs/Tripodi?

[Tom Poje]

1.414(q)-1T, A-3(b)

any rounding method permitted, as long as you ar consistent

(Minimum participation you have to round up, nhce concentration % you have to round down, but there is no restriction on HCE top paid group determination)

of course, if you are an actuary, my understanding the answer is simply "What do you want it to be"

[rcline46]

I agree with Tom. Any rounding, applied consistently to a plan, is permitted. Of course you can always change you method and be consisten after the change....

[PensionNewbee]

not just the rounding, but the whole concept - that a 5% owner with comp less than the HCE limit is still an HCE even if the top paid group election is made...

where can I find the regs online?

[Tom Poje]

I suppose 1.414(q)-1T Q-3,

though I am using a 2003 book and this section hasn't been updated for the new rules - e.g. it doesn't say $80,000 as indexed

Who is an HCE?

1(i) employee is 5% owner in look back year

2(i) employee is 5% owner in determination year

1(iii) comp AND top paid group

[Blinky the 3-eyed Fish]

Tom, you are right about that actuary crack.

[PensionNewbee]

thanks Tom! This helps a LOT! So, to summarize, anyone who is a more than 5% owner is an HCE regardless of compensation, and they won't get knocked out of the box by applying the top paid group election, since that's based on compensation, not ownership. And it says this in 1.414(q)-1T ??

[RTK]

Actually, the basic concept (5% owner in preceding or current year, or $80,000 compensation as adjusted in preceding year and if elected in top paid group in preceding year) is in 414(q).