FAQs – Need-to-Know Basics
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What is a Highly Compensated or a Key Employee?
The “Key Employee” category is primarily used to determine whether a Top Heavy Minimum contribution is required for that plan year (see the “Top Heavy Determination” FAQ for more information).
What is a Highly Compensated Employee?
In addition to the expected discrimination rules such as the ADP/ACP (deferral/match) tests, coverage requirements, etc., HCEs cannot have access to “Benefits, Rights and Features” in a discriminatory manner. “Benefits, Rights and Features” include access to plan loans, the availability of special investment options or rights (e.g., an option to elect to have individual brokerage accounts), distribution options, etc.
Currently, a Highly Compensated Employee is defined as an employee who satisfies one of the following:
- Any employee who received compensation in excess of $215,000 in the prior year (2017 limit for a 12/31/2018 determination year-end);
- Any owner with an interest greater-than-5% in either the current year or prior year; as well as the spouse, children, parents and grandparents of such greater-than-5% owner (due to ownership attribution rules under IRC 318)
What is a Key Employee?
A Key Employee is defined as an employee who, during the preceding plan year (or current year for an initial plan year) was (or is):
- An officer with compensation in excess of $175,000 (2017 limit for a 12/31/2018 determination year-end);
- A greater-than-5% owner (in the preceding year); as well as the spouse, children, parents and grandparents of such greater-than-5% owner (due to ownership attribution rules under IRC 318); or
- A 1-percent-or-more owner with compensation in excess of $150,000.
In a Controlled Group or Affiliated Service Group of companies, ownership in an individual company is used to determine whether an employee is a greater-than-5% owner. If so, the employee is a key employee with regard to each member of the Controlled or Affiliated Service Group.
What determines whether a plan is Top Heavy?
What is the determination date for a Top Heavy plan?
Account balances for this purpose include (a) any distributions due to employee termination in the prior year, and (b) any in-service distributions (that is, distributions received while still an employee of the plan sponsor) for the prior five plan years.
If the account balances of terminated participants who have not taken a complete distribution are included in this determination for one plan year after the plan year in which they terminated, their account balances are disregarded for this determination in subsequent plan years.
How are Top Heavy Minimum Contributions calculated?
Employee deferrals count as an allocation for determining whether a Top Heavy contribution is required, but not for satisfying the Top Heavy contribution requirement. Therefore, in a 401(k) Plan with no Safe Harbor provisions, if a Key Employee deferred salary in a Top Heavy plan, a Top Heavy contribution requirement would be triggered for that plan year even if the company made no match or profit sharing contributions.