How do you determine who is in the top-paid group?

[Guest Tara Curran]

How do you calculate the 20% top-paid group of employees? Is it as follows:

(1) First list all officers and owners and then all employees in order by compensation.

(2) Calculate 20% of total employer compensation.

(3) All officers and 5% owners are automatically included in the top-paid group.

(4) If officers and 5% owners do not make up 20% of total employer compensation, then you include the highest paid employees until you reach 20% of total employer compensation.

[Guest]

top paid group deals with HCE determination.

since 1997 officers only apply to determination if an ee is 'key'

if an ee is a 5% owner (more than) at any time in the current year or prior year, that person is an HCE. this does not effect the count for the # of hces at all.

to determine the top paid group, count all bodies in the current year. take 20% of that number. you are allowed to round up or round down.

you are allowed to exclude from your body count ees who have not reached age 21, worked less than 6 months, normally work less than 17 1/2 a week.

list all ees in order of comp (including owners) and anyone making more than 80,000 and in the top 20% will be an HCE the following year. you are allowed to break ties anyway you desire.

[Guest Tara Curran]

If an employee has more compensation than an owner/officer, then the employee may be a member of the top-paid group and the owner/officer may not be part of the top-paid group?

Example:

A company has 5 employees all with compensation over $80,000. The owner earns $190,000 of compensation, his son earns $85,000 and one of the other employees earns $300,000. Is the employee earning $300,000 the only one included in the top-paid group?

[Richard Anderson]

You used the term "owner/officer". Officer information is not relevant for HCE determination.

If the company has only five employees, then only the highest paid employee will be in the top paid group. (5 x 20% = 1).

Although the owner and son are not in the top paid group; they are HCEs because of more than 5% ownership.

But, I don't think that you will want to use the top paid group election if all employees made over $80,000 in the prior year. If all employees are HCEs, then the non-discrimination rules are deemed to be passed. In fact there is no prohibition against discriminating against HCEs.

[EGB]

Why is the son an HCE? The facts did not say he was an owner and there should not be any attribution between the father and the son.

[Guest Mr. X]

Beth,

I am afraid you are incorrect. I would recommend reading IRC Section 318.

[EGB]

I see. I was thinking of family aggregation being repealed in the context aggregating the compensation of family members(ie, the elimination of former 414(q)(6)), but I now see that family aggregation applies in the context of determining who constitutes a 5% owner, which in turn determines HCEs. Thanks.

[david rigby]

Perhaps better terminolgy would be to state that *family aggregation* was repealed, but this has no effect on *family attribution.*