HCE issues - when is HCFE important? Does an HCE become an NHCE in so

[Guest Lucie]

1. If a non-owner employee earns $81,000 in 1997, and $35,000 in 1998 and 1999, is it correct that the employee is an NHCE for 1998 and an NHCE for 1999?

No this employee would be a HCE for 98 because he/she earned more than 80,000 in 97. Yes, this employee would be a NHCE for 99 since he earned less than 80,000 in 98.

2. When and/or why would Highly Compensated Former Employees (HCFEs) be important in relation to ADP/ACP testing and/or determining HCEs and NHCEs that matter?

For the purposes you are questioning, a HCE former employee could have come into play when the family aggregation rules were in effect (pre-SBJPA). If the former employee was a 5% owner or one of the ten highest paid employees, the family members of the HCE would be aggregated with the HCE when testing. So in short, you could have dragged a NHCE family member into HCE status.

[John A]

lucie, thanks for the response. I agree with you on 1. - I should have double-checked what I typed. The point is, an employee can go back and forth between being an HCE and an NHCE. So if the non-owner employee had comp. of $81,000 in 1997, $35,000 in 1998, and $90,000 in 1999, the ee would be an HCE in 1998, an NHCE in 1999, and an HCE again in 2000, correct?

Regarding HCFEs, are you saying that post-family aggregation rules, HCFEs are irrelevant in all situations?

[Guest Lucie]

I suppose they would come into play in the stock attribution rules related to who is a 5% owner which you already referenced. I am not well versed in defined benefit plans. Therefore, it is possible that former HCEs do come into play with regard to some of the nondiscrimination rules related to defined benefit plans.

[John A]

A participant is an HCE if either of the following is true:

1.a greater than 5% owner (including by attribution) in the current or lookback year, or

2.greater than $80,000 (as indexed) comp in the 12 months prior to the current plan year.

An employer can amend the plan document to use the top-paid 20%.

If a non-owner employee earns $81,000 in 1997, and $35,000 in 1998 and 1999, is it correct that the employee is an NHCE for 1998 and an NHCE for 1999?

If an employee terminates employment prior to the determination year, is there any reason the employee could be important in determining HCEs and NHCEs?

When and/or why would Highly Compensated Former Employees (HCFEs) be important in relation to ADP/ACP testing and/or determining HCEs and NHCEs that matter?