Another Top Paid Group Question

[MarZDoates]

Plan elects to use the top paid group to define HCEs. I am starting with 27 employees. I am rounding down to determine that we would count 5 employees in the top paid group.

Comp in descending order from look back year:

EE 1 $600,000 (also a more than 5% owner)

EE 2 $500,000 (also a more than 5% owner)

EE 3 $452,000 (also a more than 5% owner)

EE 4 $400,000 (not an owner)

EE 5 $350,000 (not an owner)

EE 26 $24,700 (more than 5% owner)

Many many HCEs do I have?

We are having a disagreement in our office. I think 6 (emloyees 1 thru 5) plus ee 26 since more than 5% owner. Collegue says 5 , including the lower paid more than 5% owner.

Are we confusing 5 in the top paid group with 5 HCEs?

Thank you!

[Lou S.]

6 - you always add back in any 5% owners who are not HCEs by compensation after determining your HCEs with or without the TPG election.

[Tom Poje]

Hope you bet a pizza on this one. Have your colleague read item (3) (or even act like Bart Simpson and write it on the chalkboard 100 times)

Code, section 414(q)
(q) Highly compensated employee
(1) In general

the term “highly compensated employee” means any employee who—
(A) was a 5-percent owner at any time during the year or the preceding year, or
(B) for the preceding year—
(i) had compensation from the employer in excess of $80,000, and
(ii) if the employer elects the application of this clause for such preceding year, was in the top-paid group of employees for such preceding year.
The Secretary shall adjust the $80,000 amount under subparagraph (B) at the same time and in the same manner as under section 415 (d), except that the base period shall be the calendar quarter ending September 30, 1996.
(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.
(3) Top-paid group
An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20 percent of the employees when ranked on the basis of compensation paid during such year.

[Lou S.]

Think about this way. You have an employer who has only 10 employees, all participants each of whom own 10% of the company. Compensation for 1 & 2 is $500,000. Compensation for 3 - 10 is $300,000. The plan uses the TGP.

There is no way you can argue that you only have 2 HCEs because of the TPG election. Not that it would matter in this case because all would be HCE but I think you get the point.

[MarZDoates]

Hope you bet a pizza on this one. Have your colleague read item (3) (or even act like Bart Simpson and write it on the chalkboard 100 times)

Hee hee!!

[chc93]

For whatever it's worth, I've always rounded up (I can't recall where I read this). That is, 25 employees is 5 in the top paid group, 26 employees is 6 in the top paid group. So in your case, EE6 would also be in the top paid group, and you would have 7 HCE's.

[ETA Consulting LLC]

For whatever it's worth, I've always rounded up (I can't recall where I read this). That is, 25 employees is 5 in the top paid group, 26 employees is 6 in the top paid group. So in your case, EE6 would also be in the top paid group, and you would have 7 HCE's.

I was wondering if someone was going to speak to the 'rounding down' comment

[NJ Mike]

I think the Regs say you can round up, down or nearest al long as it is done in a consistent and nondiscriminatory manner.

[ETA Consulting LLC]

Please provide a cite. I'm aware that when determining the number to use, you may exclude certain groups of employees, for instance, employees who've been employed for less than 6 months. I've never read any Reg saying you may round down.

Please provide the Reg.

[Tom Poje]

1.414(q)-1

Q-3(b) Rounding and tie breaking

last sentence

....In such cases, the employer may adopt any rounding or tie breaking rules it desires, so long as such rules are reasonable, nondiscriminatory, and uniformly and consistently applied.

(I guess dice rolling (unless they are weighted), paper- rock -scissors, or other means could be used)

[chc93]

Thanks Tom. Is Q-3 still in the temporary reg 1.414(q)-1T ? As far as I can tell, only Q-9 is in the final 1.414(q)-1.

[Tom Poje]

yes

[BG5150]

Remember, there are two distinct and separate HCE tests. You add the results together.

1) Ownership test: 5% owners and those attributed ownership.

THEN

2) Compensation test.

2a) Flat HCE compensation limit test. Everyone who made more than the applicable HCE compensation limit is an HCE

--or--

2b) Top Paid group. Everyone in the top fifth of total compensation (that is over the HCE limit) is an HCE.

Anyone who is in either or both of the tests is an HCE.