3804. Who are highly compensated employees for purposes of the qualification requirements?Nuco Employeercline212014-08-17T15:12:00Z2014-08-17T15:12:00Z711876766Summit Business Media5615793814Site Map/Retirement Plans/Pension And Profit Sharing/Qualification/Employees and Employershighly compensated HCE NHCE2005-01-25T00:00:00ZTaxFactsDefaultArticle116380357-00-tf1.xml359.00;#2248;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1Who are the “highly compensated” employees for purposes of the qualification requirements?105700.000000000TaxFactsDefaultArticle2010-01-19T08:16:43ZSBMEDIA\moss-admin3804. Who are highly compensated employees for purposes of the qualification requirements?Status as a highly compensated employee is determined by focusing on the determination year (i.e., the plan year for which the determination is being made) and the immediately preceding twelve month period (the “look-back” year).An employee is a highly compensated active employee with respect to a plan year (i.e., the determination year) if the employee (1) was a 5 percent owner, as defined for top-heavy purposes (Q 3805), at any time during either the determination year or look-back year, or (2) received compensation for the preceding year in excess of $115,000 (in 2012-2014, as indexed, up from $110,000 in 2011) from the employer. The compensation element of this determination can be limited to the top 20 percent of employees ranked by compensation (the “top-paid group”).IRC Sec. 414(q)(1). The income threshold ($115,000 for 2014) is indexed at the same time and in the same manner as the Section 415 defined benefit dollar limitation.IRC Sec. 414(q)(1). See Temp. Treas. Reg. §1.414(q)-1T, A-3(c)(1); Notice 2011-90 (Nov. 21, 2011); Notice 2012-67 (Dec. 10, 2012); IR-2013-86 (Oct. 31, 2013).The applicable dollar amount for a particular determination or look-back year is the dollar amount for the calendar year in which the determination year or look-back year begins.Temp. Treas. Reg. §1.414(q)-1T, A-3(c)(2); Information Letter to Kyle N. Brown dated December 9, 1999.Employers may identify the employees who are highly compensated employees under IRC Section 414(q) using the same snapshot testing that is used for the non-discrimination requirements (i.e., test results for a single day during the plan year, provided that that day is representative of the employer’s workforce and the plan’s coverage throughout the plan year).Rev. Proc. 93-42, 1993-2 CB 540, as modified by Rev. Proc. 95-34, 1995-2 CB 385.The IRS has stated that a fiscal year plan may make a calendar year data election. If the election is made, the calendar year beginning with or within the look-back year will be treated as the employer’s look-back year for purposes of determining whether an individual is a highly compensated employee on account of his or her compensation. This election will not apply in determining whether a 5 percent owner is highly compensated. The effect of this election is that even though an employer maintains a plan on a fiscal year basis, it uses calendar year data. Once made, the election applies for all subsequent years unless changed by the employer.Notice 97-45, 1997-2 CB 296.Top-Paid GroupAn alternative way to determine highly compensated employees is to make a “top-paid group” election. The top-paid group election must be made in the plan document. The top-paid group of employees for a year is the group of employees in the top 20 percent, ranked on the basis of compensation paid for the year.IRC Sec. 414(q)(3). Once made, a top-paid group election remains in effect until the employer changes it via plan amendment.Notice 97-45, 1997-2 CB 296. Former employees are not included in the top-paid group. Also, employees who are excluded under the collective bargaining agreement exclusion in determining the number of employees in the top-paid group also are excluded for purposes of identifying the members of the top-paid group.Temp. Treas. Reg. §1.414(q)-1T, A-9(c).In determining the number of employees in the top-paid group (but not for the purpose of identifying the particular employees in the group), the following employees may be excluded:IRC Sec. 414(q)(5); Temp. Treas. Reg. §1.414(q)-1T, A-9(b). (1)employees with less than six months of service, including any service in the immediately preceding year; (2)employees who normally work fewer than 17½ hours per week, if certain requirements are met;See Temp. Treas. Reg. §1.414(q)-1T, A-9(e). (3)employees who normally work during not more than six months in any year, determined on the basis of the facts and circumstances as evidenced by the employer’s customary experience in the years preceding the determination year;See Temp. Treas. Reg. §1.414(q)-1T, A-9(f). (4)employees under the age of 21; and (5)employees covered by a collective bargaining agreement if 90 percent or more of the employees of the employer are covered under the agreement and the plan being tested covers only employees who are not covered under the agreement.Temp. Treas. Reg. §1.414(q)-1T, A-9(b).An employer may elect to use a shorter period of service, smaller number of hours or months, or lower age than those specified above (including no age or service requirement exclusion).IRC. Sec. 414(q)(5). See Temp. Treas. Reg. §1.414(q)-1T, A-9(b)(2)(i). Also, an employer may elect not to exclude members under the collective bargaining exclusion.Temp. Treas. Reg. §1.414(q)-1T, A-9(b)(2)(ii).No special notification or filing of a top-paid group election or a calendar year data election is required, although certain plan amendments may be necessary to incorporate a definition of highly compensated employees that reflects the election.Notice 97-45, 1997-2 CB 296. Furthermore, a consistency requirement states generally that an election made by an employer operating more than one plan must apply consistently to all plans of the employer that begin with or within the same calendar year.Notice 97-45, 1997-2 CB 296.Nonresident aliens who receive no earned income from sources within the United States are disregarded for all purposes in determining the identity of highly compensated employees.IRC Sec. 414(q)(8). An employer may adopt any rounding or tie-breaking method that is reasonable, nondiscriminatory, and uniformly and consistently applied.Temp. Treas. Reg. §1.414(q)-1T, A-3(b). An employee who is highly compensated as a result of meeting two or more of the tests above is not disregarded for the purpose of applying any of those tests to other individuals.Temp. Treas. Reg. §1.414(q)-1T, A-3(d). Compensation is the compensation received by the participant from the employer for the year, including elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement, or a tax sheltered annuity.IRC Sec. 414(q)(4); Temp. Treas. Reg. §1.414(q)-1T, A-13.A highly compensated former employee for a determination year is any employee who had a separation year prior to the determination year and was a highly compensated active employee for either his or her separation year or any determination year ending on or after his or her fifty-fifth birthday.Temp. Treas. Reg. §1.414(q)-1T, A-4.A separation year is any year during which the employee separates from service with the employer. For purposes of this rule, an employee who performs no services for the employer during a determination year is treated as having separated from service with the employer in the year that he or she last performed services for the employer. An employee will be deemed to have a separation year if, in a determination year prior to attainment of age 55, the employee receives compensation in an amount less than 50 percent of his or her average annual compensation for the three consecutive calendar years preceding the determination year in which the employee received the greatest amount of compensation from the employer (or the total period of the employee’s service with the employer, if less). Because an employee who is deemed to have a separation is still performing services for the employer during the determination year, the employee is treated as an active employee and the deemed separation year is relevant only for purposes of determining whether the employee will be a highly compensated former employee after he or she actually separates from service. An employee with a deemed separation year will not be treated as a highly compensated former employee by reason of the deemed separation year if the employee later has a significant increase in services and compensation and, thus, is deemed to have a resumption of employment.Temp. Treas. Reg. §1.414(q)-1T, A-5. The controlled group, common control, and affiliated service group aggregation rules, as well as the employee leasing provisions, are applied before applying the highly compensated employee rules (Q 3803, Q 3807, and Q 3809).IRC Sec. 414(q)(7). The entity aggregation rules are not taken into account for purposes of determining who is a 5 percent owner. The separate lines of business rules also are not applicable in determining the highly compensated group.Temp. Treas. Reg. §1.414(q)-1T, A-6, A-8.