1% Owner for Key Purposes - Clarification

[BeanCounterBlues]

I'm aware that for Key Employee determination purposes, a 1% owner with greater than $150,000 of compensation is considered Key.

My research tells me that 1% doesn't mean 1%, but means greater than 1%. An online IRS examination manual states that 5% is "greater than 5%" but that 1% is just 1%. I'm guessing that the manual just doesn't expand on the point, that 1% means greater than 1% for this purpose, but a strict read would say otherwise.

I work with a plan that will become top heavy if a 1% owner pops over $150,000 (he's close). He owns exactly 1.00%. Given the cost to the employer of becoming top heavy........

He does not become key, unless he owns 1.0000000000001% (exaggerated to make a point), and earns >%150,000 - am I correct?

Thank you for any assistance.

[Belgarath]

Per IRC 416(i)(1)(B)(ii), it is more than 1%.

[GMK]

In the definitions section here:

https://www.law.cornell.edu/uscode/text/26/416

a 1% owner is person who owns more than 1%.

.. as Belgarath said already.

[BeanCounterBlues]

Thank you both for your input, I've read the code, and the regs (and numerous other sources). At the risk of splitting hairs, I'm looking to verify that "more than 1%" does not include 1.0%.

[My 2 cents]

In the absence of official guidance to the contrary, mathematically, 1.000000....% is not more than 1%.

[david rigby]

... but "official guidance" from the government might be different.

Old story: a famous actuarial professor told his students of his testimony before a state legislature that was considering a bill that defines Pi as 3.0. Fortunately, they took his advice.

[My 2 cents]

Remember the old 1.4 combined plan limits under IRC 415 (dating myself here - they went away circa 2000) that keyed off of fractions with 1.25 in the denominator? That came about because an important legislator was convinced that 1.4 = 1 1/4, and nobody dared disabuse him of that.

[Belgarath]

If you'd like an additional source, look at 1.416-1, T-16 - again, it specifies the words MORE THAN.

I'm not aware of any official guidance that states explicitly what you are looking for. I think the IRS probably assumed that the rather plan language was self-evident.

My 2 cents - is that really true? Or is it just one of those enjoyable stories that have no basis?

[My 2 cents]

If you'd like an additional source, look at 1.416-1, T-16 - again, it specifies the words MORE THAN.

I'm not aware of any official guidance that states explicitly what you are looking for. I think the IRS probably assumed that the rather plan language was self-evident.

My 2 cents - is that really true? Or is it just one of those enjoyable stories that have no basis?

Although I cannot personally vouch for it being other than an apocryphal tale, I heard that years ago at a conference from someone who I presumed was in a position to know. Mathematical literacy is not usually considered a prerequisite for membership in the US House or Senate. After all, some of those state legislators who vote in favor of defining pi as 3.0 are able to move up to national office, and if you hold your seat long enough, people (especially those in governmental positions) dare not tell you how wrong you may be.

[GMK]

If "more than 1%" included 1%, then it would say "1% or more." More than enough is never just enough.

So, do you think my belt is too short now, because they reduced pi to 3.0? or maybe because I 've had more than enough pie?

[david rigby]

Remember the old 1.4 combined plan limits under IRC 415 (dating myself here - they went away circa 2000) that keyed off of fractions with 1.25 in the denominator? That came about because an important legislator was convinced that 1.4 = 1 1/4, and nobody dared disabuse him of that.

I heard that also. The speaker was Ira Cohen, now retired IRS actuary. He would know.

[My 2 cents]

Remember the old 1.4 combined plan limits under IRC 415 (dating myself here - they went away circa 2000) that keyed off of fractions with 1.25 in the denominator? That came about because an important legislator was convinced that 1.4 = 1 1/4, and nobody dared disabuse him of that.

I heard that also. The speaker was Ira Cohen, now retired IRS actuary. He would know.

If Ira Cohen said it, that's good enough for me.

[BeanCounterBlues]

Thanks for my daily chuckle, and everyone's thoughts. Your commentary was actually very helpful (in my making a decision).

[Tom Poje]

in addition, without having run other software except Relius, I suspect none of them would indicate a key employee if you entered exactly 1%.

reminds me of years ago ...

I had one case we ran a projected ADP test in early Nov.

one individual owned exactly 5%, was deferring the max

the projected comp was 110,000.12

which would make them an HCE the following year

I told them no matter what happens to make sure the comp did not go over 110,000, even if it means the person found 12 cents mysteriously sitting on his desk when he came in to work in the morning.