Top 20% election - employees who have irrevocably waived

[Belgarath]

I'm probably missing something, but I can't find anything in 414(q) or the 414(q) regs addressing this.

S-corporation, new leveraged ESOP has the two head honchos irrevocably waiving participation, as the plan would otherwise fail 409 testing.

The plan document utilizes the top 20% election to determine the HC. Question is this - when determining the top 20%, are these two INCLUDED or EXCLUDED from the determination process? Since I find nothing that says you can or must exclude them, it would seem that they should be included. On the other hand, this doesn't seem reasonable, similar to doing 401k testing where someone has zero comp for the year, so you exclude them entirely from the testing. Of course, following the coverage testing rules, these people are treated as non-excluded and not benefiting, so maybe that is the more reasonable interpretation, in fact, that's where I lean.

Anyone ever encountered this, or have an opinion?

[Tom Poje]

I would include them in the count. The regs say you can exclude those who have worked less than 6 months, normally work less than 17 1/2 hours a week, normally work less than 6 months, less than age 21, non resident aliens, union folks. There is nothing in the list of exclusions that says "elect out off plan'

then, at least my understanding, you rank the folks by comp. these folks might be in the top 20%, but since not in the plan, you 'lose' an HCE (in other words, there is nothing in the regs I see that says "If you have an ee in the group not eligible, you substitute the next highest paid ee)

In other words something like : is the employee in the top 20% paid ees? YES (it doesn't ask Is the employee in the top 20% of ees in the plan)

Is the employee eligible in the Plan? NO

[ESOP Guy]

I would include them also. I would also agree they help your coverage test as they would be HCEs and not benefiting.

I would answer the same way if they are excluded by a 1042 election.