Is Employee in the ADP test?

[Lynn Campbell]

Non-Owner/HCE earning > $80,000 in 1997 and 1998 was in 401(k) Plan. He terminated at end of 1998 and did not provide any services in 1999 but received 1999 W-2 for small ($2,500) amt. Is he in the ADP test as a NHCE for 1999? He did not defer any $$ in 1999 and I would like to leave him out of testing...thanks for all input.

[Guest]

if ee earned 80,000.01 or more in 1998 he would be treated as an HCE in 1999. (unless top paid group election was selected, and he was not in this group) remember, compensation in 1999 has no effect if you are an hce in 1999.

now, all that being said, don't change your mind and say, goody, goody, I will include him as an HCE cause it helps my test.

there is no clear guidance in this area. certainly severance pay is NOT to be included. and everything I've read said follow this line of thought:

you can exclude ees who term in 1998 but whose final paycheck was in 1999. but you must be consistent. e.g. if you have an NHCE who also received a 'last' paycheck the first week of the year who deferred 15% you can't include him if you exclude others who did not defer.

consistency!

[MWeddell]

As the previous post said, he's a HCE for 1999.

Whether he's included in the test depends on whether he was eligible to make elective deferrals into the plan at any point during 1999. While the IRS frowns on allowing employees to defer from severance pay made after the employee has ceased to provide services, if your plan document clearly allows the employee to make elective deferrals and has a determination letter, it might push you toward including him in the test.