Owneship % semantics

[truphao]

Let's focus on the ownership tests only - It is my understanding that for a person to be considered an HCE the ownership level is at 5%, and for a person to be considered a key employee the threshold is at "more than 5%".  So, if for a two-person partnership, setting up the ownership level at 5.01% and 94.99% avoids both the non-discrim and top-heavy tests.  Am I correct?

[david rigby]

IRC 414(q)(2) defines 5% owner for purposes of HCE.  That definition references IRC 416(i)(1).

[justanotheradmin]

If there are no other employees - no Non-highly compensated employees - then yes, the nondiscrimination tests would be deemed to pass, and yes the plan would be top heavy, but there would be no minimum contribution due. 

So they apply, but don't impact the plan because there is no one else. 

[truphao]

Thank you all. Just to confirm staying at 95% / 5% ownership would trigger a TH allocation to the 5% partner, correct?

[Bri]

Well we haven't figured out if the guy would qualify as Key under the 1% owner test.

[truphao]

he will not

[Paul I]

Let's not forget that if the employer is not a corporation, any person who owns more than five percent of the capital or profits interest in the employer is considered a more than 5% owner.  Technically, for example, a 95%/5% capital interest split wouldn't make both partners key employees, but allocating more than 5% of the profits in a year to the 5% owner would make it work for that year.

And while not on topic, let's add to the perks of an owners-only plan that the plan gets to file a Form 5500-EZ.