HCE definition

[R. Butler]

We just became tpa for Co. A's plan. Co. A is an S Corp.

Person A is a 3% owner on 01/01/2013. On 09/01/2013 Person A becomes a 6% owner. The 2013 K-1 will show pro-rated ownership of 4.25% (or something right about there.)

Prior tpa forwarded us the 2013 ADP/ACP test which has Person A as an NHCE. I spoke with plan sponsor about it. They are hoping to avoid refunds and want to assert that Person A is an NHCE for 2013 because the pro-rated ownership on the K-1 is less than 5%. Does anyone see any validiity to that assertion?

I don't see it. It is my understanding that if an employee is a more than 5% owner at any point during the current plan that employee is considered an hce. I thought it would be worth a stab in the dark though to try to find a valid argument supporting the plan sponsor's "hoped for" result.

Thanks in advance for any guidance.

[Kevin C]

Your understanding is correct.

414(q)(2)5- percent owner.— An employee shall be treated as a 5-percent owner for any year if at any time during such year such employee was a 5-percent owner (as defined in section 416(i)(1)) of the employer.