11. Definition of highly compensated employee

Statement of Requirement: Code§I RC 414(q); Treas. Reg. § 1.414(q)-1T; Notice 97-45 ,1997-33 I.R.B. 7

Document Provision: _____

Sample Plan Language:

The term highly compensated employee means any employee who: (1) was a 5-percent owner at any time during the year or the preceding year, or (2) for the preceding year had compensation from the employer in excess of $80,000 (adjusted at the same time and in the same manner as under Code § IRC 415(d)) and, if the employer so elects in the plan, was in the top-paid group for 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.

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 5-percent owner at any time during the determination year or the lookback year) with compensation in excess of $80,000 (adjusted at the same time and in the same manner as under Code § IRC 415(d)) 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.

( ) In determining who is a highly compensated employee the employer does not make

a top-paid group election.

( ) In determining who is a highly compensated employee (other than as a 5percent

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 lookback year.

(Note to reviewer: Regulations promulgated under Code §I RC 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 Treas. Reg. § 1.414(q)-1T, A-4 and 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 (adjusted at the same time and in the same manner as under Code § IRC 415(d)) 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

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election to determine whether employees 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 the 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.

If a qualified plan contains the definition of highly compensated employee and an employer 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 amendments must reflect the choices made in the operation of the plan for each determination year.)