Is a 1% owner of an S-Corp considered an HCE for ADP testing

[Guest jhilliard]

Helping a client identify HCEs for ADP testing purposes and was under the impression that an HCE was either a 5% owner/family or made over the comp limit. Someone today mentioned that in an SCorp any owner was considered an HCE, no matter their percentage of ownership. I wasn't aware their were different definitions of HCE depending on the company structure. Does anyone know if this is accurate, thanks.

[jquazza]

I don't believe that to be true. If you look at the 414(q) regulations, nowhere does the Service disguinshe a C-Corp from an S-Corp.

[Brian Gallagher]

Maybe the person was getting it confused with the 1% ownership rule of Top Heavy testing? (even then the owner needs to make < $150k)

[Blinky the 3-eyed Fish]

Someone today mentioned that in an SCorp any owner was considered an HCE, no matter their percentage of ownership.

Did you subsequently search him for a crack pipe?

[Guest dsw713]

Not to beat a dead horse, but I just came back from a training session that told me that any shareholder (regardless of %) of an S Corp is a HCE. I'm trying to get this confirmed. We were discussing the ADP and ACP test when this came up.

[Guest dbvail]

My copy of the Code is a year old, but unless someone can produce evidence of a change, there is no distinction made in Sec 414 of the tax tratment of the Corporation. As such, the 5% rule seems intact and healthy.

[Blinky the 3-eyed Fish]

Dsw, who said this? Do you have this in writing? Can you scan and post it?

[Guest dsw713]

I don't want to trash anybody until I get an answer. I've emailed my instructor from my 401k training session yesterday and asked to speak w/their technical experts and address where they got this info from. I can't find any documentation anywhere either, which is why I'm suspect. Will keep you up to date when they respond.

[E as in ERISA]

Is it just a precautionary measure? S-Corp shareholders who perform services for the organization but don't take compensation are at risk for having a certain amount of their flow through taxed as wages instead (so that it becomes subject to employment taxes, etc.). If that occurs, then they could end up with compensation greater than the compensation limit....

[jquazza]

Katherine, I am not sure I get your point, at any rate, I thought the pass-through income from S-Corp could not be used for pension purposes (I believe it stems from an old case Durando vs. US.) Did that change?

[E as in ERISA]

I'm just saying that what the individual says the amount is and what the IRS says the amount is don't always agree. The individual may say its flow through income, but if the individual has been performing services for the entity then the IRS might say that part of the flow through is actually wages then it would be re-characterized as such. See for example http://www.huddlestontaxconsulting.com/id16.html

If it is changed to W-2 wages for employment tax purposes, then it would also become wages for plan purposes.

If you have an S-Corp owner whose not working for the business, then its not an issue. But if you have an S-Corp owner who is working for the business, they might be an HCE based on recharacterization of some of the flow through as wages.

I.e., if you have a 1% S-Corp owner working full time for the S-Corp in a position worth $150,000, but getting $200,000 flow through and only $25,000 wages (from which the person is deferring $10,000), it is possible that the IRS would say that the person has $150,000 of wages and $75,000 of flow through.

I'm just wondering if that is what these authorities are worrying about. Otherwise, I don't see why a 1% S-Corp owner would be an HCE.