HCE and Active Military Duty

[metsfan026]

This is a situation I've now encountered, so I wanted to check.

- Participant has no ownership stake in the company. 
- In 2023 they made about $200k, therefore they were considered an HCE in 2024.
- In 2024 the participant missed several months due to being on active military duty, thus earning about $75k

So, my understanding is that for 2025 they would not be considered an HCE.

Is that accurate?  Thanks in advance!

[JustSayin]

Has the employee returned to work?  If so, what does the Plan say about deemed compensation during the time they were on leave of absence due to Qualified Military Service?

[Peter Gulia]

BenefitsLink neighbors, I don’t read metsfan026’s inquiry as asking about what nonelective contributions and opportunities to restore elective and matching contributions the participant gets regarding one’s absence for military service.

Rather, I read the inquiry to ask whether determining highly-compensated status for 2025 by looking to 2024 compensation looks to the amount the participant received during 2024 or considers an amount for as-if compensation approximated under USERRA’s provisions for counting deemed compensation on which to determine USERRA benefits and opportunities.

The Treasury’s temporary interpretation suggests the I.R.C. § 414(q) measure looks to the compensation the participant received (without USERRA-deemed compensation).

26 C.F.R. § 1.414(q)-1T https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(q)-1T.

Does anyone read that rule or the statute it interprets differently?

A plan’s administration might need two or more measures of compensation, distinguishing compensation to measure required or permitted contributions and compensation to determine who is or isn’t treated as highly-compensated in the next year.

This is not advice to anyone.

[Paul I]

My understanding is any compensation paid by the employer to an employee who is or was on active duty for more than 30 days (e.g., differential pay or a continuation of the compensation) is considered in making the determination of the employee's status as an HCE, but the employer can elect to exclude this pay from the definition of Plan Compensation for purposes of determining contributions.

This is based on the elections available in the pre-approved plan adoption agreement and the associated basic plan document that we use for our clients.

[metsfan026]

13 minutes ago, Paul I said:

My understanding is any compensation paid by the employer to an employee who is or was on active duty for more than 30 days (e.g., differential pay or a continuation of the compensation) is considered in making the determination of the employee's status as an HCE, but the employer can elect to exclude this pay from the definition of Plan Compensation for purposes of determining contributions.

This is based on the elections available in the pre-approved plan adoption agreement and the associated basic plan document that we use for our clients.

The document includes it, but the client says they didn't pay any.  So the total salary is under the HCE so that what it is?  I just want to make sure I'm understanding

[Peter Gulia]

I checked the definition of highly-compensated employee in the basic plan document of a widely used recordkeeper’s set of IRS-preapproved document. It states expressly that compensation to determine who is a highly-compensated is not according to the plan’s definition of compensation but rather according to Internal Revenue Code § 414(q).

That subsection states “‘compensation’ has the meaning given such term by section 415(c)(3).” I.R.C. § 415(q)(4).

Your mileage may vary.