Is he an HCE for the 1999 ADP test?

[richard]

A full time employee was hired 6/1/98 at a payrate of $10,000 per month ($120,000 per year).

The 401k plan is a calendar year plan year, with a 1 year waiting period, and entry dates of July 1 and January 1.

Our employee becomes eligible for the plan on 7/1/99.

In performing the ADP (and ACP) tests for 1999, is he an HCE?

(Note that his 1998 earnings for the part of the year that he worked was $70,000 and his 1999 earnings was $120,000.)

Case 1: The plan is not using the look-back rule.

Here, since his 1999 pay was $120,000, I believe that he is an HCE for 1999. Is this correct?

Case 2: The plan is using the look-back rule.

Here, I believe he is not an HCE for 1998, but is an HCE for 1999. However, he does enter the ADP test for 1999 as an HCE. Is this correct?

Thanks.

[Guest JF]

Seems that in Case 2 the answer would be based on whether he qualified as a HCE in 1998. If he was getting 10,000 monthly from 6/1 - 12/31, that would be $70,000 for 1998 income. Asuming you are not using the top paid group definition, it doesn't seem he would be a HCE . (??)

[Tom Poje]

there is no such thing as using a look-back or not.

the guy (or gal) either made $80,000 or not in the prior year. end discussion.

That is the whole concept of pension simplification. you know ahead of time who an HCE is. you don't wait til this year to find out. e.g. suppose the guy made 6666.66 a month in 1999. you would have no idea until the last day of the year to find out if he was an hce. Pension simplification did away with that. the only exception to the rule is possible change in ownership during the year.

[Guest FredReilly]

I am a little confused by the terminology. Isn't he first an HCE in 2000? Then isn't his percentage used in the test for 2001 using the look back method, or for 2000 using the current year method?

[LCARUSI]

Fred -

Yes, he is an HCE in 2000 based on his compensation for 1999.

He will be included in the k/m test for 1999 as an NHCE.

He will be included in the k/m test for 2000 as an HCE. The maximum allowable ADP for the HCEs in the 2000 test will be based on the ADP for the NHCEs from the 1999 test (unless they make the current year election - in which case the maximum allowable ADP for the HCEs in the 2000 test will be based on the ADP for the NHCEs in the 2000 testing).