1% owner for key employee

[nancy]

If an employee is a more than 1% owner and earns more than $150,000, he is a key employee for top heavy purposes. If his wife is also an employee and makes less than $150,000 is she a key employee through the rules of attribution of section 318?

[Dan]

The definition of Key Employee from Code Section 416(i)(1)is as follows:

For purposes of this section --

(1) Key employee. --

(A) In general.

The term ``key employee' means an employee who, at any time during the plan year or any of the 4 preceding plan years, is --

(i) an officer of the employer having an annual compensation greater than 50 percent of the amount in effect under section 415(B)(1)(A) for any such plan year,

(ii) 1 of the 10 employees having annual compensation from the employer of more than the limitation in effect under section 415©(1)(A) and owning (or considered as owning within the meaning of section 318) the largest interests in the employer,

(iii) a 5-percent owner of the employer, or

(iv) a 1-percent owner of the employer having an annual compensation from the employer of more than $150,000.

Respectfully, in the situation described above, I do not believe the spouse would be a Key based on (iv) above since it requires ownership and compensation. The compensation component of the definition is clearly not met.

Assuming spouse is not an officer, Spouse may be Key based on (ii) only.

[nancy]

He is an officer but is not one of the top ten owners. She is not an officer. He is a 1% owner who makes more than $150,000. She makes $48,000.

[Ervin Barham]

Generally, yes. See Code Section 416(i)(1)(B)(iii).

[nancy]

That was my opinion also. Someone else in my office felt that since she did not make $150,000, she would not be considered key. Thanks for your input.

[Dan]

He is an Key Employee by more than one definition. However, I would determine that she is not a Key Employee.

Incidentally, she would not be a Key Employee, even if she was an officer.

Good Luck.

[Ervin Barham]

Hmm, can a pension person be persuaded to change his mind?

After reading Dan's answer, I could be persuaded to read it that way. I was coming at this only from the attribution standpoint- my apologies for sleepwalking.

[Larry M]

Now I am surely confussed.

I thought the attribution rules of section 318 apply to 1% owners as well. If so, the spouse of a 1% owner is considered top heavy as well.

[Dan]

The ownership attribution rules do apply when determining Key Employee status.

We may not attribute Key Employee status, we only attribute ownership. After attribution of ownership, the spouse's (in this case) status is determined based in other criteria.

However a 1% owner is not a Key Employee based solely on owning 1% of the plan sponsor. A 1% owner must also satisfy the $150,000 earnings requirement to be classified as a Key Employee.

If the ownership attribution were in excess of 5%, then the spouse would be a Key Employee regardless of earnings.

I hope that helps.