RPF M5 U1 Highly Compensated Employees Flashcards
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What are Highly Compensated Employees (HCEs)?
HCEs are generally those who are greater than 5% owners of the company (directly or through attribution) or earned more than the HCE compensation threshold ($150,000 in 2023).
What are Nonhighly Compensated Employees (NHCEs)?
NHCEs are employees who are not classified as HCEs.
Why is it important to distinguish between HCEs and NHCEs?
Many elements of testing are based on the benefits the plan provides to HCEs in comparison to NHCEs. A plan will fail testing if it favors HCEs too much.
What information is necessary to determine HCE or NHCE status?
Proper ownership percentages, compensation amounts, and relationships between employees are required to determine HCEs.
What is a 5% Owner?
A 5% Owner is a person who owns more than 5% of the company, either through personal ownership or attribution.
What is Attribution in the context of ownership?
Attribution is the concept of treating an individual as owning an interest that the individual does not directly own, often due to family or business relationships.
What is the ownership test for HCE status?
An employee is considered an HCE if they have greater than 5% ownership of the company at any time during the year for which the plan is being tested.
What is the compensation test for HCE status?
An employee is considered an HCE if their compensation exceeds the defined threshold ($150,000 for 2023) in the lookback year.
What is the Top-Paid Group Election?
The Top-Paid Group Election limits the number of HCEs based on compensation and requires employees to be in the top 20% when ranked by compensation.
What employees can be excluded from the Top-Paid Group calculation?
Employees who have not completed six months of service, work less than six months per year, work less than 17.5 hours per week, or are younger than age 21 may be excluded.
What happens if compliance test failures are not corrected?
If corrections are not made, the plan could lose its qualified status.
