Is this person a Key or Highly Compensated Employee/Standardized prototype question.

[Beltane]

Ownership of P.C.

A = 53%

B = 32%

C = 10%

D = 5% [exactly]

P.C. has employees.

Ownership of LLP

A,B,C and D each own 25%

LLP has no employees nor pays wages, and probably never will.

If P.C. adopts a standardized plan, must LLP be included as a controlled group member? If so, does that make D a key employee and an HCE? My thinking is Yes and Yes, because of the LLP ownership.

If P.C. adopts a nonstandardized plan, the LLP would not have to be a plan sponsor. Thus, under IRC 416(i)©, would this prevent D from being considered a key and highly compensated employee? [iRC 414(q) refers to IRC 416(i) for applying the 5% rule].

[R. Butler]

If P.C. adopts a standardized plan, must LLP be included as a controlled group member? If so, does that make D a key employee and an HCE? My thinking is Yes and Yes, because of the LLP ownership.

Agreed.

If P.C. adopts a nonstandardized plan, the LLP would not have to be a plan sponsor. Thus, under IRC 416(i)©, would this prevent D from being considered a key and highly compensated employee? [iRC 414(q) refers to IRC 416(i) for applying the 5% rule].

No. It my understanding that the P.C. & LLP are considered as 1 employer for HCE & key employee determination even if they don't both mainstain the plan.

[Beltane]

Sorry, I meant IRC 416(i)(1)©. Ignoring the compensation aggregation example under Treas. Reg. 1.416-1, Q & A T-20, it seems like D would not be a key or high employee if the IRC 414 attribution rules do not apply..? If only the P.C. adopts the plan, and D is only a 5% owner of the P.C. and ownership of the LLP is not aggregated via IRC 416(i)(1)© and the Treas. Reg mentioned, D would only be considered a 5% owner of the employer, thus not key or high, unless I am missing something ...

[Blinky the 3-eyed Fish]

I think you are misinterpreting the statute. The fact that there is no aggregation means you aren't adding up the ownership amongst the related entities. For example, if someone owned 4% in A and 4% in B, he is considered owning 4%, not 8% and is not a key employee. In your case, they are all keys and HCE's for that matter based on ownership.

Whether the employers maintain the plan or not has nothing to do with it.

[R. Butler]

It is my understanding that what you refer to means that determination of who is a 1% or 5% owner is done on an employer by employer basis and that if the individual meets the ownership requirements with respect to one corporation he is key with respect to all.

For example assume D owns 2% of PC & 5.1% of LLP, but he doesn't own more than 5% if PC & LLP are considered together. It is my understanding that the reg. you cite is saying D is still key because you don't aggregate, but rather look at each employer separately.

I'm not sure it will help you any better but Q&A T-16 & T-17 deal with ownership. Q&A T-20 deals with comp. & illustrates that you do aggregate for comp.

[Beltane]

Thank you, I see my misinterpretation!