Exclusion of Former Shareholders

We have a law firm with 9 current shareholders with ownership greater than 5%.  There is one former shareholder who is receiving compensation based on revenue of his clients when he sold out (paid as W-2 compensation) - he does not actually work.  And there is another shareholder who has sold a portion of his stock, is now below 5%, who is "on call" for questions about his clients and is paid a monthly amount (about $200 a month) but otherwise not active.

The problem is these individuals are eligible for top heavy and are now considered NHCEs for discrimination testing. 

I am considering amending the Plan to have these individuals excluded from the Plan by definition (retiring shareholders as an example).  The Plan would easily pass coverage excluding them.

Any thoughts greatly appreciated.

Would this former shareholder receiving a W2 be an HCE? If not, you will have a hard time excluding him on the basis that he used to be an owner. Same for the other person, although I can't imagine that a ~$70 top heavy contribution will rile up the sponsor. 

Is it normal for someone to receive a W2 when they don't do any work?

On who should receive a W2: "You must file Form(s) W-2 if you have one or more employees to whom you made payments including for the employees’ services in your trade or business during 2017."

As to the first person, just because he is receiving W-2 compensation doesn't mean that he's an employee or that the compensation is "compensation" for plan purposes.  Sounds like deferred compensation to me. 

As to the second person:  (1) Isn't there a rule that says if you were an HCE after age 55 you will always be an HCE?  Maybe that would be some help here.  If not, can't the employer just give him a QNEC to bring his ADP up to an acceptable level?  (2) Assuming he really is entitled to a top-heavy contribution, what's the big deal?  3% x $200 equals $6 per month.  

Maybe give him more to help testing......

Or ask him if he will defer 90% of pay

Thanks for replies.  I am not aware of an age 55 rule (once HCE after 55 always HCE).  Is there a cite?

2 hours ago, TPA Bob said:

Thanks for replies.  I am not aware of an age 55 rule (once HCE after 55 always HCE).  Is there a cite?

I don't think that applies to active employees; I believe it would only be for determining whether the employee is a highly compensated former employee (see 414(q)).

Why do we need to be concerned with a former employee being highly compensated?

The first individual you mention no longer has any hours of service; zero hours in the year means no eligibility.  He is being paid deferred compensation.

As to the second individual, he is going to be great for testing purposes.  He is still working (how many hours is he being paid for?) so he is an ongoing participant for TH purposes.  But he makes $2400 a year?????? So, who cares?  Can you do the math at 3%??? :-)  Plus, as an NHCE making $2400, very small additional amounts given to him will increase his EBAR enormously for testing purposes (with a -11g amendment).  So look at him as a BONUS, not a liability.

First, if you pass coverage without them (assuming they are NHCEs), then you can exclude them with plan language, or even by name if you're passing ratio percentage.

I agree with most of the other comments as well, i.e. the first individual is receiving deferred comp that would not count for 415. The second individual you need to exclude as described in first paragraph to avoid top-heavy.