When am I a key employee?

Hi

PS plan, top heavy for 2021. Both key and non-key receive top heavy minimum. Plan also has 5% gateway requirement for non-HCEs.

Beginning of 2021, Joe owned 100% of the company

July 1 2021, Joe sold 20% to an employee, Mary.

As of 12/31/2021, ownership is 80/20.

When did Mary become a key employee?

What contribution does Mary need to get for 2021?

Thank you

How would you determine the 2021 top heavy minimum in the following scenario.  The 2021 plan year is top heavy as determined by the 12/31/2020 account balances.  Let's assume that Mary was not an Officer in 2020, and so was not a Key Employee for purposes of the 12/31/2020 determination.  Let's assume too that the plan provides that only non-Key EEs receive a top heavy minimum.  

For the 2021 top heavy minimum is Mary considered to be a Key Employee or a non-Key Employee?  I've seen this discussed in the EOB (Key Employee Definition), that there are two opinions.  One says that even though she is clearly a Key Employee for the 12/31/2021 determination (for 2022 top heavy status), because she was not a Key Employee for the 12/30/2020 determination (for 2021 top heavy status), she is considered to be a non-Key for the 2021 top heavy minimum.  

The other opinion says that she is a Key Employee in 2021 for all purposes, including if she gets a 2021 top heavy minimum, which under this scenario she would not.

Is this EOB information still relevant, and any one care to share their view?

I'm of the mind that the code says she's a key employee for 2021 and is key-employees are excluded from TH minimum benefits she is not entitled to TH minimum for 2021.

Though I have seen the other position taken, I'm just not sure it's supported by the actual 416 code.

Gilmore, she was not an officer in 2020, just a rank&file employee, making under 100k. She purchased 20% in 2021.

4 hours ago, Lou S. said:

I'm of the mind that the code says she's a key employee for 2021 and is key-employees are excluded from TH minimum benefits she is not entitled to TH minimum for 2021.

Though I have seen the other position taken, I'm just not sure it's supported by the actual 416 code

That's interesting Lou.  The EOB says the IRS has agreed with the first option, which is she would not be a Key Employee for purposes of the 2021 top heavy minimum, but says that the second option is the one that most aligns with the Code, which is your take as well.

I'm aware the IRS sometimes makes up rules, often because they have to when it's not clear from the code or regulations. At other  times they seem to take positions because they can whether or not they are supported by the rules spelled out in the code and regulations. I mean who a key employee is and when they are a key employee is pretty well defined in the code and regs, and non-key employees must benefit under 416 in TH plans. It seems like the IRS EOB is taking a position that a key employee is not a key employee for benefit purposes in the year they become a key employee for some reason that I can't really fathom.

I don't think I've had a plan that fits that specific fact pattern where the client didn't want to give key employees at least the T-H minimum and a person also became a key employee that year. I don't think the IRS position would hold up under court, but I don't think I'd want to be the test case for it either.