HCE Definition

[Guest Pete Joachim]

Looking for clarification.

Determination Year = 2006

When I rank my employees by wages for 2005, the prior year, one employee who earned say $120k also terminated in 2005.

First - I assume I still include the terminated guy in my ranking.

Assuming I do that, I end up with say 10 employees that equal 20% and the guy that teminated in 2005 is included in that group.

Since one of the 10 employees terminated in 2005, do I take the next guy on the list to get to 10, or do I just have 9 HCEs for 2006?

Pete

[Mike Preston]

9. Plus anybody who is an HCE via ownership.

[Guest Pete Joachim]

The ownership being a given, that's what I thought, too, but someone questioned it in the office and it seemed like a possible outcome under the law (the law of course being unclear). If 20% = 10 employees, then shouldn't you have 10 HCEs in determination year. But I never did it that way in the past.

Thanks for the reply Mike.

[Tom Poje]

This is not the American League with a designated HCE rule. if an individual who by comp is ranked in the top 20% also quits then you will have a lesser number of HCEs.

lets go even further. suppose a calendar year plan has a 1 year wait. a doctor is hired 8/1 and makes 200,000. he could easily be an HCE, but ineligible the following year. he would not be 'replaced' by another lesser paid individual making more than the indexed dollar amount.

[Guest Pete Joachim]

Thanks guys - this confirms my thinking as well.

Pete

[Guest pensionadmin]

See IRS Notice 97-45 that backs up what other posts have said.