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:

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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 : (1) w as 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.

or (2) for the preceding year had compensation from the employer in excess of $80,000 and, if the employer so elects in the plan, was in the top-paid group for the preceding year. The $80,000 amount is adjusted at the same time and in the same manner as under § 415(d).

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.) A highly compensated former employee is based on the rules applicable to determining highly compensated employee status as in effect for that determination year.

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 $ 80,0001 50,000 (as adjusted for periods after 2023) for the look-back year is a Highly Compensated Employee only if the employee was in the toppaid group for the look-back year.

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( ) In determining who is a highly compensated employee the employer does not make a top-paid group election.

( ) 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. Regulations promulgated under § 414(q) provide that the employer may elect to have special rules apply with respect to the determination of who is a highly compensated employee if they are provided for in the plan and they are applied by the employer on a uniform and consistent basis. The definition above does not provide for these special elections. See Reg. § 1.414(q)-1T, A-4 and Notice 97-45.

Notice 97-45 provides for additional elections under the amended § 414(q) that may be made. These elections are the top-paid group election and the calendar year data election, both of which are referred to in the definition of a highly compensated employee in the Adoption Agreement, above Under Notice 97-45 an employer may make a top-paid group election for a determination year. The effect of this election is that an employee (who is not a 5-percent owner at any time during the determination year or the look-back year) with compensation in excess of $80,000 (as adjusted) 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. 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. The plan may not use this election to determine whether employees

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are highly compensated employees on account of being 5-percent owners. These elections, once made, apply for all subsequent determination years unless changed by the employer.

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 and b efore an employer either makes or changes either a top-paid group election or a calendar year data election for a determination year, the plan must reflect the choices made. Any retroactive a mendment made for this purpose s must reflect the choices made in the operation of the plan for each determination year.)