11. Definition of highly compensated employee

Statement of Requirement: Code § 414(q); Reg. § 1.414(q)-1T; Notice 97-45, 1997-2 C.B. 296

Sample Plan Language:

1. The term Highly Compensated Employee means:

a. any Employee who for the preceding year had compensation from the Employer in excess of $135,000, and, if the employer so elects in the Adoption Agreement, was in the top-paid group for the preceding year;

(Note to reviewer: The $135,000 compensation threshold amount is adjusted for cost-of-living increases to the extent provided under Code § 414(q) for years after 2022. See Note to reviewer below.)

b. any former Employee who was a Highly Compensated Employee for the year they separated from service or at any time after attaining age 55; and

c. any employee who was a 5-percent owner at any time during the year or the preceding year.

For this purpose, the applicable year of the plan for which a determination is being made is called a determination year and the preceding 12-month period is called a look-back year.

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2. Whether a former Employee was a Highly Compensated Employee for a determination year that ended on or after the employee's 55th birthday or that was a separation year is based on the rules applicable to determining Highly Compensated Employee status as in effect for that determination year, in accordance with section 1.414(q)-1T, A-4 of the Treasury Regulations and Notice 97-45.

(Note to reviewer: Code § 414(q)(1)(B) provides the compensation threshold amount, and further provides that the threshold will be adjusted each year for additional cost-of-living increases. For limits in other years, see COLA Increases for Dollar Limitations on Benefits and Contributions.)

Sample Adoption Agreement Language:

( ) In determining who is a Highly Compensated Employee the employer makes a top-paid group election. The effect of this election is that an employee (who is not a 5percent owner at any time during the determination year or the look-back year) with compensation in excess of $150,000 (as adjusted for periods after 2023) for the look-back year is a Highly Compensated Employee only if the employee was in the top-paid group for the look-back year.

( ) The Employer revokes its top-paid group election.

( ) In determining who is a Highly Compensated Employee (other than as a 5-percent owner) the employer makes a calendar year data election. The effect of this election is that the look-back year is the calendar year beginning with or within the look-back year.

( ) The Employer revokes its calendar year data election.

(If none of the boxes are checked, there is no top-paid group election and no calendar year data election.)

(Note to reviewer: There are two elections that an employer may make with respect to the definition of highly compensated employee. Under Code § 414(q)(1)(B)(ii), an employer may make a top-paid group election for a determination year. The effect of this election is that an employee with compensation in excess of the dollar limit for the look-back year is a highly compensated employee for the determination year only if the employee was in the top-paid group for the look-back year. Under Section V of Notice 97-45, an employer may also make a calendar year data election for a determination year. The effect of this election is that the look-back year is the calendar year beginning with or within the look-back year. These elections, once made, apply for all subsequent determination years unless changed by the employer. The top-paid group election and the calendar year data election are described in Notice 97-45.

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An employer making one of these elections is not required also to make the other election. However, if both elections are made, the look-back year in determining the top-paid group must be the calendar year beginning with or within the look-back year. These elections must apply consistently to the determination years of all plans of the employer that begin with or within the same calendar year. See Notice 97-45, section VI.

If a qualified plan defines highly compensated employee before an employer either makes or changes a top-paid group election or a calendar year data election for a determination year, the plan must reflect the choices made. Any amendment made for this purpose must reflect the choices made in the operation of the plan for each determination year.)