Top Heavy Determination

[Janice F]

Here is the situation:

Determination of Top Heavy for 2010 (as of 12/31/2009), I have 2 persons who are 1% shareholders but did not earn the required compensation in 2009 to be Key Employees. However, these same individuals were also 1% owners in 2008 and did have greater than the required comp in 2008 to be considered key employees as of 12/31/2008 for TH calc (for purposes of the 2009 plan year). This is not a safe harbor and neither of the 2 individuals took a distribution in 2009.

My question is this: for the 12/31/2009 test (which applies to 2010), are these 2 individuals included as Key EEs even though they earned less than the 150K comp requirement in 2009? I thought that they would be treated as 'former key employees' and their balances excluded from the 12.31.2009 test altogether. TPA is saying that because they were Key as of 12/31/2008, they are automatically KEY for the 12/31/2009 test in spite of the fact that for 2009 they both earning less than $150K.

[Guest Sieve]

I agree with you (assuming that these individuals are not 5% owners, in which case compensation is immaterial and they are keys for 2009 testing). Tell the TPA that it is the HCE definition, not the key employee definition, which looks at prior year comp (perhaps that is the confusion).

[Guest JWR]

Can a person become key again once they have been a former key? Say a participant is an officer with the requisite compensation. A year later he takes a different position in the company and is no longer an officer so becomes a former key. Two years later, he marries the owner. Is he now key again?

[Guest Sieve]

The short answer is Yes. The exclusion of the formey key employee's accounts from the numerator & denominator of the TH fraction only applies if the former key employee is a current non-key employee. If that former key employee once again becomes a current key employee, then he/she is not currently a non-key and therefore is once again a key employee included in the calcualtion for purposes of the TH determination.