Key Employee Question

[Guest jefe96]

How should a more than 5% owner of a company, who does not take a salary, be treated for purposes of the top heavy test? We take the conservative route and classify him as ineligible since he has no comp, that he's not included in the ADP since he of course is not able to defer anything with no comp. The question is, should he be included as a key employee in performing the top heavy test, even though he is ineligible?

[Blinky the 3-eyed Fish]

What do you mean by ineligible? If he is truly being treated as ineligible to participate in the plan, well then he wouldn't have an account balance and it wouldn't matter how you treated him for the top heavy testing.

Please clarify.

[Tom Poje]

Top heavy rules are slightly different, the code simply says ignore ees who have not performed 'any service' in the last year. it doesnt say 'took no comp'

It is certainly possible the ee is performing service and not getting comp.

I am assuming the ee inquestion was at one tome collecting comp, was in the plan, etc, but now for whatever reason is not taking comp.

[Guest jefe96]

He's being treated as ineligible because he does not receive any compensation from the employer, nor was he reported with any hours of service during the year. He still maintains his ownership, and is not retired. He at one point in time originally met the eligibility requirements, but now is more or less a silent owner, but has not retired or terminated employment. He does have a balance in the plan because he did make and receive contributions in prior years.

[Guest jefe96]

Correct, he used to take a salary, but now he doesn't. He is "semi-retired" I guess you could call it. In terms of performing service, it's hard to tell. My guess is that he does not show up 9-5 anymore, but I'm sure in one way or another he does perform some sort of service. It's just not tracked by the employer.

[JanetM]

I have to think that he is showing comp somewhere.... Schedule C or K-1. The only way he can be part owner and not have comp is if this is C corp.

From your post it sounds like the employer is trying to bend the rules a bit.

[Guest jefe96]

It is a C corp. Employer's not trying to bend the rules really, just trying to avoid having to give top heavy mins for '04. Since if he's in the test, then they're top heavy, if not, then they're not.

[Blinky the 3-eyed Fish]

He is "semi-retired" I guess you could call it. In terms of performing service, it's hard to tell. My guess is that he does not show up 9-5 anymore, but I'm sure in one way or another he does perform some sort of service.

It sounds as if you have the answer to the question. He did perform service and should be included in the test. Of course the TH min depends on the greatest % any key got, so I assume there is another key with an annual addition during the year.

[austin3515]

I would explain to the client that if the owner performed service, he is in the test, and the THM's are required. Then ask them to determine if he had any hours or not, and then to let you know in writing.

I should point out that I don't own a TPA shop. Perhaps I wouldn't be so cavalier if I did?