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Top Heavy FAQs
Even when using the “top-paid group election” to determine highly compensated employees, the 5% owners rule must be considered since 5% owners may not be in the top 20% group. How can these rules be reconciled? Email Alert 2004-14 07/09/04 |
The highly compensated group consists of individuals who own more than 5% of the business entity in either the current plan or the prior year, and employees who received compensation in excess of $80,000 (as indexed--$90,000 in 2003) the prior plan year. The top-paid group election permits the employer to limit the highly paid group to owners and the top 20% of employee when ranked by compensation.
An employee is a member of the top paid group if he or she is among the highest paid 20% of all employees. |
For purposes of applying the 20% rule (i.e. determining the size of the group, but not who is actually in the group) the following employees are excluded:
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Employees with less than 6 months of service |
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Part-time employees (less than 17½ hours per week) |
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Seasonal employees who normally work less than 6 months during the year |
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Employees under the age of 21 |
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Nonresident aliens without U.S. source income |
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Collective bargaining agreement employees if they represent 90% or more of all employees and none of the collective bargaining employees are benefiting under the plan. |
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| The employer may adopt any tie-breaking rules it desires where two or more employees have the same compensation. Such rules must be reasonable, nondiscriminatory and uniformly and consistently applied. |
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EXAMPLE 1 |
| Law Firm Employee Data for 2004 |
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Prior Year Compensation |
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HC |
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HC/Top 20% |
1. |
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Senior Partner |
$300,000 |
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X |
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X |
2. |
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Senior Partner |
$250,000 |
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X |
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X |
3. |
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Partner |
$180,000 |
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X |
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X |
4. |
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Partner |
$150,000 |
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X |
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X |
5. |
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Associate |
$108,000 |
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X |
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6. |
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Associate |
$98,000 |
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X |
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7. |
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Paralegal |
$60,000 |
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8. |
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through 20 are Staff |
Less than $60,000 |
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| Total HCEs |
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6 |
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4 |
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Top 20% calculation: Total eligible employees 20 X 20% = 4 (Total HCEs)
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EXAMPLE 2
Using the same demographic as above with a change in the status of employee 7 who in this example has a 6% ownership in the firm (possibly due to family attribution).
In that case using the HCE definition there would be 7 HCEs.
Using the Top Paid Group election we would count the top 4 compensated employees as we did in example 1. However in addition, we would also have to count the 5% owner as an HCE and thus have a total of 5 HCEs. |
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