Key Employee Determination

[ErisaGeek]

Facts: Company A is a brand new company. The company was formed on January 1, 2005. The same year they start a calendar year 401(k) plan - 1/1/05 through 12/31/05. The top heavy determination date will be 12/31/05 being the first plan year.

Q1) One of the key employee determination is an officer whose annual compensation exceeds $135,000 in 2005. However since this is the 1st year the determination date is 12/31/05. Does that mean that you use $135,000 compensation limit the first year as well as the second year while determining the key employee status?

OR

Q2) Basically it means that since there was no compensation in 2004 an officer cannot be a key employee in 2005. Am I correct?

How do you apply the key employee definition in case of an officer especially since the compensation limit is bumped up from $130,000 to $135,000.

Any IRC reference would be appreciated.

Thank you.

[buckaroo]

Since no one else has answered, I thought I would give it a shot.

A1) I think it is the same for each year. Let's break this down into each year anyway.

For T-H determination for 2006, 2005 is your determination period. I think you would use compensation amount of 135,000 in 2005. This is the T-H Plan Key Employee Comp figure I have on the latest chart for 2006.

For T-H determination for 2005, 2005 is your determination period. I think you would use compensation amount of 135,000 in 2005. This is the T-H Plan Key Employee Comp figure I have on the latest chart for 2005.

Therefore, if the ptp is a key then he/she is a key for both years and the bal is counted for both years.

A2) The determination year for the first year the plan is in existence is the first year. Therefore, it is the first year that you have to look at. I think the fact that the company doesn't exist in the prior year is irrelevent.

This is just my best guess. I do not have a reference for you.