How to define Compensation and HCEs for testing purposes?

[MD-Benefits Guy]

Our 401k plan specifies that we use w2 wages for compensation, but I don't believe that it stipulates which method to use...top 20% or the compensation income limit ($115,000 for 2012 I think). Can we use either top 20% or compensation limit if not defined by the plan documents?

Also, are companies required to use the same methodology and compensation definitions for Health and Welfare testing as their 401k testing? Can a company use top 20% and W2 compensation for 401k, but use the basic 415©(3) definition of compensation and comp limit of 115k for Health and Welfare testing? If companies are required to use identical definitions, can someone point me to the specific section of the law spelling out this requirement.

Thanks.

[ETA Consulting LLC]

If your plan does not authorize the use of the top paid group, then you may not use it. Hence, anyone whose Compensation during 2012 "EXCEEDED" $115K will be an HCE.

To your second question, Yes. All plans of the employer must use the same criteria for determining HCEs. You may not implement the top paid group for one plan and not the other. Also, when the top paid group is used, there is some flexibility with the exclusions when determining the actual number. You must be consistent with this criteria across all plans.

Good Luck!

[rcline46]

ETK - you must use the same Top Paid Group rules across all Qualified plans, that is true. THe question was if that rule is also forced to Caeteria and H & W plans. I admit I have not looked for the answer, and I do not work on those plans, but I think the definitions for HCE and such are different.

[ETA Consulting LLC]

I understood the question. The fact is that the HCE definition for H & W plans is more liberal; where many employees can be considered HCE merely because they are managers who earn more (but not necessarily above $115K. At the same time, the H & W definition of Comp also references HCE under IRC Section 414(q) as one of the requirements (meaning if you're an HCE in a Qualified Plan, then you're also an HCE in the H & W Plan). This is where all plans utilizing the 414(q) definition must apply the Top Paid group election in a consistent manner. It is not whether it is a pension plan or welfare benefit plan, but whether 414(q) applies or not.

Notice: You may be an HCE in an H & W plan and not an HCE in the Qualified Plan. However, if you're an HCE in the Qualified Plan, you're also an HCE in the H & W plan. For 414(q) purposes, the Top Paid Group must be applied to all plans in the same manner.

Good Luck!