HCE

[John Feldt ERPA CPC QPA]

Bill, the 50% owner of the corporation, buys the other 50% from his sister Mary in mid-2009. He does not have enough cash to do this, so his sister holds a promissory note (more on this later). The company has a calendar year 401(k) plan. Mary is an employee and is still an HCE in 2010 due to her prior ownership.

Mary did not retain any repurchase rights, but she held liens/collateral interest in her company shares, the building, some land, etc. as security for the promissory note from her brother since he did not have the cash to pay for her shares outright.

Mary's wages have always been only about $50,000 per year so she is not an HCE due to wages.

Is Mary an HCE in 2011?

Is Mary an HCE in 2012?

[Lou S.]

I don't think so after the plan year following the transaction. Just because the shares are pledged as collateral doesn't mean she owns them. I think they are just security for the loan unless she she has an option to buy them. Now if the loan defaults and she receives stock in lieu of payment she would once again have ownership interest.

But I am not an attorney.