top paid group/top heavy

[Chippy]

I have recently worked on two different plans for the first time, and in previous years, neither one included the officers earning over the comp limit as key. Am I missing something?

For the top paid group calculation, are the officers earning over 165,000 considered highly compensated employees if their comp does not fall into the top 20%? More than 1% owners are considered HCE's if their comp isn't in the top 20%, but are officers treated the same for the top paid group? That would make them Key but not HCE? Is that possible?

[ETA Consulting LLC]

Top paid group is terminology for HCE determinations only and has nothing to do with Key Employee determinations.

Good Luck!

[My 2 cents]

It is my understanding that it is possible for someone to be key but not an HCE (or vice versa), and that merely being an officer earning above a certain level does not necessarily make the officer a key employee (if the officer lacks a sufficient degree of executive authority). Being a 1% owner is relevant for determination of key employee status but I don't think it comes into play for HCE status. HCE is either a 5% owner (without regard to compensation or whether or not the person falls into the top 20%) or pay above a certain threshold (and limited, if applicable, to the top 20% of all employees). Executive authority is taken into account in determining whether someone is a key employee but not with respect to HCE status. So it may well be that someone can be a key employee but not an HCE (and certainly one may have HCEs who are not key employees - for that think of a very successful commissioned salesperson. If not an owner and not an executive officer, not a key employee).

[BG5150]

A 1% owner is NOT an HCE unless the compensation (in the look-back year) puts him/her over the comp limit and into the TPG (if the plan is using that method of determination).

[masteff]

And, as the IRS notes in this link which discusses top heavy and key employees: "Review the top-heavy rules and definitions found in your plan document."

http://www.irs.gov/Retirement-Plans/401(k)-Plan-Fix-It-Guide---The-plan-was-top-heavy-and-required-minimum-contributions-were-not-made-to-the-plan.

(It also says as others have commented above: "It’s important to note the distinction between key employees, who count for top-heavy purposes, and highly compensated employees, who count for the ADP and ACP tests, but not the top-heavy tests.")

[BG5150]

(It also says as others have commented above: "It’s important to note the distinction between key employees, who count for top-heavy purposes, and highly compensated employees, who count for the ADP and ACP tests, but not the top-heavy tests.")

HCEs play a role in a lot more than ADP/ACP. Just about any test other than top heavy consideration concerns HCEs vs NHCEs.

[Chippy]

The officers that I mentioned above are the CFO and CIO of a Law Firm. Both earn over 165,000 and have for years, and were never included as key in the top heavy test. I would think they should be included as key for top heavy. Agreed?

[Belgarath]

While one might typically assume that if it is a small firm, these job titles titles don't generally appear in small firms. You need to look at your census to make the appropriate determination.

[masteff]

How many other officers do you have? Remember that: "The maximum number of employees who can be treated as officers for purposes of counting as key employees is 50, or, if lesser, the greater of 3, or 10% of the employees." http://www.irs.gov/irm/part4/irm_04-072-005.html

You need to look at facts and circumstances. You ought to have a high level of certainty before changing from a prior methodology. Assume your predecessor was competent, not incompetent, so can you reach their same conclusion? Do the CFO and CIO have any corporate authority or are they merely high level managers with big titles?

Reg. 1.416–1, T–13 (emphasis added)

Q. For purposes of defining a key employee, who is an officer?

A. Whether an individual is an officer shall be determined upon the basis of all the facts, including, for example, the source of his authority, the term for which elected or appointed, and the nature and extent of his duties. Generally, the term officer means an administrative executive who is in regular and continued service. The term officer implies continuity of service and excludes those employed for a special and single transaction. An employee who merely has the title of an officer but not the authority of an officer is not considered an officer for purposes of the key employee test. Similarly, an employee who does not have the title of an officer but has the authority of an officer is an officer for purposes of the key employee test. In the case of one or more employers treated as a single employer under sections 414(b), ©, or (m), whether or not an individual is an officer shall be determined based upon his responsibilities with respect to the employer or employers for which he is directly employed, and not with respect to the controlled group of corporations, employers under common control or affiliated service group. A partner of a partnership will not be treated as an officer for purposes of the key employee test merely because he owns a capital or profits interest in the partnership, exercises his voting rights as a partner, and may, for limited purposes, be authorized and does in fact act as an agent of the partnership.