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Are owners always included in the top paid group when determining HCEs? I have a plan with 3 owners plus one other employer making over $115,000. If there are only 11 total employees, my top paid group would only include two people. Do I just take the three owners even if the other employee has th

Feb 06, 2013 by Sharon from Grand Rapids, MI in  |  Flag
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An important aspect of performing the ADP and ACP tests is to properly identify the HCEs. IRC section 414(q) defines HCEs to generally include any employee who:

Was a 5% owner at any time during the year or preceding year (a 5% owner is someone who owns more than 5% of the employer), or
For the preceding year had compensation from the employer in excess of $115,000 (for 2012 and 2013; subject to cost-of-living adjustments in later years) and, if the employer elects, was a member of the top-paid group (top 20%) of employees.

Family aggregation rules may affect the treatment of stock owned directly or indirectly by family members. The law treats any individual who is a spouse, child, grandparent or parent of someone who is a 5% owner, or who, together with that individual, would own more than 5% of a company’s stock as a 5% owner. As a 5% owner, each of these individuals is an HCE for the plan year. It's important to identify the family ownership interests of all company stock and to forward that information to the TPA, advisor or persons performing the nondiscrimination tests.


Comment   |  Flag   |  Feb 07, 2013 from Lititz, PA

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Jason Hull Level 20

The basic answer is that if you are a 5% or more owner (or your spouse or lineal descendants are), then you're HCE. Also, if you're an officer of the company, you're HCE. Here's the link to the actual IRS code: http://www.law.cornell.edu/uscode/text/26/414#q (note, the limitation is $115,000, as you correctly point out, for compensation: http://www.irs.gov/uac/2013-Pension-Plan-Limitations).

Comment   |  Flag   |  Feb 06, 2013 from Fort Worth, TX

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Sharon, yes, if you own more than 5% or are an officer, regardless of income, you are a HCE. Assuming that, you would have 4 HCE’s

Comment   |  Flag   |  Feb 08, 2013 from Delray Beach, FL

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