Non-Profits & HCEs

[JAY21]

A very small non-profit org wants to put in a DB plan but limit coverage to its director. There are only 2 other employees besides the director. The director will only be paid 60k per year and never likely much more than that and of course is not an owner of a non-profit org. I know for Key Employee def'n a person can be "deemed" a Key Employee based upon the specific facts of their position. Anyone know if there is a similar requirement in defining who is an HCE ? Can she be "deemed" an HCE by virtue of her position of power (Director) even though her comp is not sufficient and she has no ownership ?

[Effen]

You can not be deemed an HCE. If no ownership and comp < limit in prior year, you are not an HCE. However, your design will fail 401(a)26 unless it covers at least 40% of the eligible populatiion. Since 1 out of 3 is only 33%, they will need to cover at least 2.

You could set the 2nd persons benefit much lower than the 1st, but the plan would need to benefit at least 2 of the 3.

[Chester]

There is an exemption from the minimum participation rules if there are no highly compensated employees

benefitting under the plan and the plan is not aggregated with another plan to enable the other plan to satisfy 401(a)(4) or 410(b). The plan also must not be top heavy in order to meet the exemption.

[movedon]

Heh?

[SoCalActuary]

The key issue: Is the director a key employee?

If so, the one-person db would be top-heavy. End of discussion on exemption from 401(a)(26)

[Effen]

Can't be a Key if his comp is only $60K.

I not aware of that "exemption" for 401(a)(26), do you have a site?

[JAY21]

I must admit I had spaced out 401(a)(26) in my HCE def'n zeal. Chester appears to be correct in that special exemption from 401(a)(26). I looks like it is found under Tres. Reg. 1.401(a)(26)-1(b). However, I do know the top-heavy rules, unlike the apparent HCE def'n, can "deem" someone to be a Key Employee even with no ownership, although presumably they still have to also meet the relevant comp thresholds of the Key Employee def'ns which "might" bail me out still (I'll have to check Key Def'n rules and comp thresholds).

Sounds like IF this person is deemed a Key Employee it makes it top-heavy, which would mean I don't meet the 401(a)(26) exemption, so then I'd be back to needing to satisfy 401(a)(26) as Effen mentioned using a modest accrual rate for another employee(s) since I don't have any (a)(4) discrimination testing as there's no such thing as a "deemed" HCE who doesn't meet the express def'n of an HCE.

....moving on to "deemed" Key Employee issues and comp thresholds.

[Effen]

Thanks for the site. I agree it c/b exempt.

[SoCalActuary]

So long as "modest benefit" meets the top-heavy rules, I agree with Jay

[rcline46]

I remember, I Remember!!!! I remember when - if there were no key employees, the highest paid officer was a key employee!!! The 'way back' button got pushed.

Under the new rules, no way is this person 'key'. A person may still be deemed an officer if they perform the duties of an officer, but they still have to make the pay to be key.

[Chester]

I agree with RCline. You need to make more than the minimum salary for an officer

($140,000 in 2006) to be considered a key employee. The old rules used to say the highest paid officer

was a key employee, but that law changed many moons ago.

[JAY21]

Thanks for the input. The news just keeps getting better and better (for a change).

[SoCalActuary]

After your discussion, I found this new information.

http://www.nysscpa.org/cpajournal/2006/606...entials/p36.htm

It concerns the sanctions applied against directors of non-profits for excess benefits.

The issue is a facts-and-circumstances one, but it addresses one of IRS' 4 top audit priorities.

So you may be dealing with a risky position for reasons totally unrelated to ERISA.

[Kirk Maldonado]

When you say "director" do you mean a person that is on the board of directors? If the person only functions as a member of the board of directors, he or she is not an employee, much less a highly compensated employee.

However, I'd be surprised if the person would earn $60,000 per year for services solely as a director.

[JAY21]

Kirk, she is an employee as well. I believe she is the President and basically wears all the hats and does most of the work herself for the non-profit.

[SoCalActuary]

When you say "director" do you mean a person that is on the board of directors? If the person only functions as a member of the board of directors, he or she is not an employee, much less a highly compensated employee.

However, I'd be surprised if the person would earn $60,000 per year for services solely as a director.

Kirk - Please read the linked item. It refers to sanctions applied to the managing directors and other key employees of non-profits, which might include outside directors who make large donations or allow use of their assets for the non-profit organization. This is a fairly new IRS initiative, and Jay's proposed DB plan looks

like it would be targeted.