50 Answers to 401k Compliance Testing Questions

Q: What is a highly compensated employee (HCE)? 

A: The definition of an HCE has been simplified, effective for plan years beginning on or after Jan. 1, 1997 . Under the new definition, an employee is an HCE if, at any time during the previous plan year, he or she: (1) was a 5-percent owner; or (2) received more than $80,000 (adjusted to account for inflation) and, at the election of the plan sponsor, was one of the top-paid 20 percent of the work force. 

Q: Do contributions to a 401(k) plan count as compensation? -TOP

A: Yes. All salary reduction contributions, including pre-tax contributions to a 401(k) plan or a Section 125 cafeteria plan, must be included in an employee's compensation. 

Q: Must a 401(k) plan have a minimum number of employees participating? - TOP

A: No. The "minimum participation" test that requires a plan to cover at least 50 employees or 40 percent of all employees does not apply to defined contribution plans after 1996.

Q: Can I set up a qualified 401(k) plan in which only executives can enroll? -TOP

A: Probably not. A 401(k) plan intended solely for highly compensated executives is unlikely to pass the minimum coverage tests that apply to 401(k) plans (the ratio/percentage test and the average benefit test). A plan must pass at least one of these two tests. 

Q: I am self-employed. How much can I contribute to my 401(k) plans? -TOP

A: Under the TRA '97, the self-employed (including sole proprietorships and partnerships) may make both deductible employer matching contributions and the maximum employee deductible elective deferrals. Elective deferrals the self-employed can contribute are subject to the same limits and testing applied to regular employees 

Q: Our 401(k) plan failed the ADP test. Is there a way to adjust the plan so that it passes the test?-TOP

A: Yes. You may take one of four steps to eliminate (or "correct") any contributions that caused a 401(k) plan to fail the ADP test (called "excess contributions") within the 12-month period following the plan year in which the plan failed the test: cease or reduce contributions for HCEs before the end of the year (see 1'351); "recharacterize" the elective contributions of HCEs as after- tax contributions if the plan otherwise permits after-tax contributions (see p353); distribute the excess elective contributions and related earnings to HCEs (see f354); or make additional contributions on behalf of NHCEs.

Q: What about correcting a 401(k) plan that failed the ACP test? -TOP

A: As with plans that have failed the ADP test (see above), you may correct any excess employer matching contributions (called "excess aggregate contributions") within the 12-month period following the plan year in which the plan failed the test. There are three ways to correct such excess contributions:* make additional qualified matching contributions to NHCEs;* distribute the excess matching contributions and related earnings to HCEs; or * reclassify actual deferral contribution percentages as actual contribution percentages. 

Q: We're a Taft-Hartley plan. How do we run the nondiscrimination tests?-TOP

A: Taft-Hartley plans. (plans that involve more than one employer and one or more unions) are subject to the same principles that govern collectively bargained plans (see previous question). 

Q: Does an employer have to report an employee's 401(k) distribution to the IRS? -TOP

A: Yes. All distributions from a 401(k) plan must be reported to the IRS on Form 1099-R, "Statement for Recipients of Total Distributions From Profit-Sharing, Retirement Plans, Individual Retirement Accounts, Etc." The employee must be provided with a copy of the 1099-R form as well. 

Q: Can Year end "True-Up" Contributions Can Be Avoided? -TOP

A: Year end "True-Up" Contributions Can Be Avoided. A "true-up" of matching contributions (otherwise made on a periodic basis throughout the year) at the end of the year in order to take into account a participant's full-year compensation will no longer be required. Now, if the 401(k) plan specifically provides for a separate determination of matching contributions on a payroll, monthly, quarterly or annual basis, no year-end "true-up" matching contributions are needed. In addition, a plan can require employee deferrals to be made using whole percentages of pay or whole dollar amounts and still satisfy the safe harbor. This recognition of actual plan administration greatly simplifies safe harbor compliance.

Q: Can plans use electronic media to satisfy the 401(k) Safe Harbor Notice Requirement? -TOP

A: Plans Can Use Electronic Media to Satisfy the 401(k) Safe Harbor Notice Requirement. Like other sanctioned electronic notices, a participant must be told he/she can receive a written paper copy of the notice at no charge.

Q: May a 401(k) plan exclude part-time employees from plan participation? -TOP

A: No. In a field directive issued in November 1994, the IRS take the position that the exclusion of part-time employees is, in effect, service requirement that is subject to the limitations described here. According to the field directive, it does not matter that a 401(k) plan will satisfy the minimum coverage requirements after excluding part-time employees. 

Example. GHI Company sponsors a 401(k) plan that require one year of service (1,000 or more hours of service in an eligibility computation period) and excludes any employee who is regularly scheduled to work fewer than 30 hours per week. Bob has been a part-time employee (fewer than 30 hours per week) for five years but has completed more than 1,000 hours during each eligibility computation period (see Q 2:89). The 401(k) plan's exclusion of part-time employees has prevented Bob from becoming a plan participant even though he has completed five years of service. Because the part-time employee exclusion is treated as an indirect service requirement, GHI Company's 401(k) plan is subject to disqualification since it contains a length of service requirement in excess of that permitted under Code Section 410 (a) (1).

Q: What is the maximum deferral percentage in a 401(k) plan? -TOP

A: If the 401(k) plan will consist only of elective contributions, the maximum deferral percentage is 25 percent (see Limits on Elective Contributions in the previous section). For limitation years beginning before January 1, 1998 , the maximum percentage in this case would have been 20 percent. The lower maximum percentage for pre-1998 limitation years reflected the Code's requirement that elective contributions be subtracted from compensation for purposes of applying the annual additions limit. Thus, the 25 percent limitation was applied after reducing compensation by the amount of the elective contribution. 

Example. For the limitation year beginning January 1, 1997 , Alfred's annual pay was $40,000. Alfred elects to defer 20 percent of pay into the 401(k) plan, or $8,000 ($40,000 x 20 %). For purposes of computing the Section 415 limit, Alfred's compensation was $40,000 less the $8,000 elective contribution, or $32,000. The maximum annual additions limit was the lesser of 25 percent pay or $30,000. Computing this limit for Alfred yielded a limit $8,000 ($32,000 x 25%).

Q: What is the maximum annual amount deductible for a 401(k) plan? - TOP

A: In general, the maximum deductible amount for a taxable year of the employer is 15 percent of the compensation paid during the taxable year to the participants under the plan. [IRC § 404 (a) (3) (A) (i)] If an employer maintains two or more profit sharing plans, they will be treated as a single plan for purposes of applying the 15 percent limit.

Example. Employer XYZ maintains a 401 (k) plan as well as a profit sharing plan covering the same employees. Contributions to the 401 (k) plan amount to 7 percent of participant compensation. If Employer XYZ wishes to contribute the maximum deductible amount, it can make a contribution to the profit sharing plan equal to 8 percent of compensation.

Q: Is there a limit on the amount of compensation that may be taken into account in determining the maximum deductible amount? -TOP

A: Under Code Section 404(l), the amount of compensation that taken into account with respect to any participant is to $150,000 ($160,000 for taxable years beginning after This limit is adjusted in increments of $10,000.

In addition, for taxable years beginning before 1997, an HCE see Chapter 9) who is a 5 percent owner or one of the ten most highly compensated HCEs and his or her spouse and any child who has not reached age 19 before the close of the taxable year will be treated as a single employee for purposes of this limit. This is known as family aggregation. Note that family aggregation has been repealed for tax years beginning after 1996. 

Example. Claire owns 100 percent of ABC Company, which sponsors a 401(k) plan. The compensation of the employees of ABC Company for its taxable year beginning July 1, 1996 , is as follows:

 Claire's compensation of $180,000 is aggregated with Dave's and Danny's compensation ($180,000 + $75,000 + $5,000 = $260,000) and limited to $150,000 for the 1996 tax year. Hence, the maximum deductible amount for the 1996 tax year is $67,050 [($150,000 + $75,000 + $100,000 + $30,000 + $25,000 + $24,000 + $23,000 + $20,000) x 15%]. If the compensation amounts are identical for the taxable year beginning July 1, 1997 , the maximum deductible amount is $80,550 [($160,000 + $75,000 + $75,000 + $5,000 + $100,000 + $30,000 + $25,000 + $24,000 + $23,000 + $20,000) x 15%]. This amount is greater than the 1996 maximum deductible amount on account of the elimination of family aggregation.

Q: How are the limits coordinated if the employer has a money purchase or target plan? -TOP

A: An employer that maintains a money purchase or target plan with modest contributions of 10 percent of pay or less may be able to add a 401(k) plan. However, considerable care should be exercised in reviewing the individual Section 415 limits.

Q: Who is an officer? -TOP

A: An officer is an individual who serves in any one of the following capacities for the parent organization: president, vice president, general manager, treasurer, secretary, comptroller, or any other individual who performs duties corresponding to those performed by individuals in those capacities.

Q: What happens if the ADP test for a plan year is not satisfied? -TOP

A: If the ADP test for a plan year is not satisfied, the portion of the 401(k) plan attributable to elective contributions-and, most likely, the plan in its entirety-will no longer be qualified. The regulations, however, provide several mechanisms for correcting an ADP test that does not meet the requirements of the law. These mechanisms are as follows: 

1. The employer makes QNECs or QMACs that are treated as elective contributions for purposes of the ADP test and that, when combined with elective contributions, cause the ADP test to be satisfied. 

2. Excess contributions are re-characterized. 

3. Excess contributions and allocable income are distributed. 

4. The portion of the 401(k) plan attributable to elective contributions is restructured. A A plan may use any one or more of these correction methods. 

Q: What is the tax treatment of corrective distributions to employees? -TOP

A: The tax treatment of corrective distributions to employees depends on when the distribution is made. A corrective distribution made within 2 1/2 months after the end of the plan year is includible, to the extent at attributable to matching contributions, in the employee's gross income for the taxable year of the employee ending with or within the plan year in which the excess aggregate contribution arose. A corrective distribution made more than 2 1/2 months after the end of the plan year will be includible, to the extent attributable to matching contributions, in gross income for the taxable year in which distributed. The same rules apply to any income allocable to excess aggregate contributions. However, if the total amount of excess contributions and excess aggregate contributions for a plan year is less than $100, excess aggregate contributions and any allocated income will be includible in the year distributed regardless of when the corrective distribution is actually made. 

Q: What happens if a plan fails to make a corrective distribution of excess aggregate contributions and allocable income? - TOP

A: If a plan fails to make a corrective distribution during the 12month period following the plan year in which the excess aggregate contribution arose, the plan will be disqualified for that plan year and for all subsequent plan years in which the excess aggregate contribution remains in the plan. If a corrective distribution is made before the end of the 12-month period but more than 2 1/2 months after the end of the plan year, the employer will be subject to a 10 percent excise tax on the amount of the excess aggregate contributions. The excise tax can be avoided, however, if the employer makes QNECs enabling the plan to satisfy the ACP test. To be taken into account in performing the ACP test, QNECs must be made no later than 12 months after the plan year to which they relate. Thus, in 401 (k) plans using the prior-year testing method in performing the ACP test, QNECs must be made no later than 12 months after the end of the prior plan year.

Q: What eligibility requirements may be imposed on a 401(k) participant for purposes of receiving a discretionary nonelective contribution allocation? -TOP

A: A minimum hours requirement of up to 1,000 hours may be posed. 

For example, if a plan requires 1,000 hours of service, an active or terminated participant who works fewer than 1,000 hours will not be entitled to an allocation of discretionary nonelective contributions. 

A requirement that the participant be employed on the last day of the plan year may also be imposed. This requirement would generally preclude any terminated employees from receiving a portion of the nonelective contribution.

Q: How much compensation can be used for calculation plan contributions or benefits? -TOP

A: There is a limit on the amount of compensation that can be taken into account for computing plan contributions and benefits and for applying nondiscrimination tests. The 1998 limit is $160,000. This amount will be adjusted for inflation in $10,000 increments. 

Q: What are the basic limits for a 401(k) plan? -TOP

A: The amount of annual additions allocated to a participant cannot exceed the lesser of $30,000 or 25 percent of the participant's com­pensation.

Q: Who is considered a key employee? -TOP

A: A "key employee" is an employee (or relation or former employee) who, during the plan year that ends on such determination date or the preceding plan year, is

(i) an officer earning compensation in excess of $130,000 (indexed for cost-of-living adjustments in $5,000 increments),
(ii) a five percent owner,
(iii) a one percent owner earning over $150,000

Q: What special vesting requirements apply to to-heavy plans? -TOP

A: If a 401(k) plan becomes top-heavy, account balances attributable to employer contributions and matching contributions must vest at an accelerated rate, at least as rapidly as on of the following two schedules:

B-35 Q: What are the maximum contribution limits for all DC plans? -TOP

A: Maximum Benefit and Contribution Limits 

 Key Employee: Dollar amount for officer is 50% of the DB limit.

Q: Is there a new IRS ruling that states that employee salary reductions and employer matching contributions can be transferred to a 401(k) after the close of the plan year, and are treated as if made during the plan year?  -TOP

A: No. There is a private letter ruling that allows HCEs to contribute to a nonqualified plan, and then the have the contributions transferred to a 401(k) plan, up to the level where the plan can still pass the ADP test.

An employer maintained a qualified 401(k) plan and a nonqualified deferred compensation plan, both of which provided for salary deferrals. If, for a plan year, a participant elected to have salary deferrals under the nonqualified plan transferred to the qualified 401(k) plan, the lesser of the calculated ADP and ACP limits or the participant's salary deferrals under the nonqualified plan would be transferred to the 401(k) plan. (TAG)

Q: What is the Actual Contribution Percentage or ACP Test? -TOP

A: The IRS requires that the Actual Contribution Percentage (ACP) Test, also known as the 401(m) Test, be completed each year. It ensures that the plan does not discriminate in favor of Highly Compensated Employees (HCEs) with respect to employer matching contributions, and/or employee after-tax contributions. The ACP Test must be performed within 12 months following the end of the plan year. If the plan fails the ACP test, a 10% penalty tax is assessed on the distribution required to correct the failed test. To avoid the penalty tax, the plan sponsor must have the test completed, and corrective actions taken, within 2 ½ months of the year end.

Q: What are the basic rules of the Actual Deferral Percentage or ADP Test? -TOP

A: The IRS requires that the Actual Deferral Percentage Test [also known as the 401(k) Test], be completed each year. It compares the pre-tax deferral contributions made by Highly Compensated Employees (HCEs) with those made by non-highly compensated employees. The intent is to ensure that the HCE group does not benefit disproportionately from its company's 401(k) plan, as compared to the Non-Highly Compensated Employee group. To satisfy the ADP Test, a 401(k) plan must pass either of the tests below: 

1. Basic Test - The average Actual Deferral Percentage (ADP) of the HCE may not exceed 125% of that of the non-HCE. Here is an example of the Basic Test: Assume the average HCE pre-tax contribution in a company is 7% and the average non-HCE pre-tax contribution is 4%. Consider the calculations below: Test:

What is 125% of 4%?  Answer: 5%
Is 7% > 5%? Answer: Yes

Test Result:
Test Fails

2. Alternative Test - The average ADP of the Highly Compensated Employee may not exceed the lesser of either 2-percentage points above the average ADP of the non-HCE or 200% of the average ADP of the non-HCE. In other words, the sponsor must pass both Alternative Test sections. Here is an example of the Alternative Test: Assume again that the average HCE pretax contribution in a company is 7% and the average non-HCE pretax contribution is 4%. Now consider these calculations below:

Test:
What is 200% of 4%?  Answer: 8%
What is 4% plus 2%?  Answer: 6%

Take the lesser of the two answers above: Answer: 6%
Is 7% greater than 6%?  Answer: Yes

Test Result
Test Fails

The ADP Test must be performed within 12 months following the end of the plan year. If the plan fails the ACP test, a 10% penalty tax is assessed on the distribution required to correct the failed test. To avoid the penalty tax, the plan sponsor must have the test completed , and corrective actions taken, within 2 ½ months of the year end.

Q: We regularly use "temps." Must I include them in our 401(k) coverage testing? -TOP

A: Perhaps. Some temps may qualify as leased employees. People who meet the tax code's definition of a "leased employee" must be treated as employees of the organization for which they perform services, and must be included in Section 410(b) coverage testing. Generally, a leased employee: 

(1) provides services under an agreement between the recipient of those services and an employee leasing organization (such as a temporary help firm); and 
(2) has performed services for the recipient on a substantially full-time basis for at least one year. In addition, the services provided must be subject to the control of the recipient.

 Q: Do sales commissions count as compensation? -TOP

A: Yes, the basic definition of compensation encompasses sales commissions. It also includes all of an employee's wages, salary, bonuses, incentive compensation, tips, taxable reimbursements (other than deductible moving expenses) and other taxable fringe benefits paid to an employee. The definition includes both cash and noncash income.

Q: What is the ratio/percentage test? -TOP

A: Under the "percentage test" part of the ratio/percentage test, at least 70 percent of an employer's nonhighly compensated employees (NHCEs) must be eligible to participate in the plan. A plan that fails the percentage test, however, still may be nondiscriminatory if it can pass the "ratio test," under which the percentage of NHCEs who are eligible to participate in the plan (out of all NHCEs) must be at least 70 percent of the percentage of highly compensated employees (HCEs) who are eligible to participate in it (out of all HCEs). When counting NHCEs for both of these tests, collectively bargained employees; employees who do not meet minimum wage or service requirements of the plan; and certain nonresident aliens, airline pilots and terminated employees can be excluded.

Q: What is the average benefit test? -TOP

A: The third minimum coverage test, the average benefit test, consists of a fair cross-section test and a numerical test. The fair cross-section test consists of two elements. Under the first, it must be demonstrated that the group of eligible employees reflects "reasonable business classifications," based for example on job categories or salaried versus hourly employees. Under the second part, the plan must use a classification that does not discriminate in favor of HCEs. A modified version of the "ratio test" (above) is used for this purpose. The modified version permits the ratio of NHCE to HCE eligibility percentages to be significantly less than 70 percent, depending on the relative number of NHCEs the plan sponsor employs. The numerical average benefit test requires that the average of all employer-provided contributions (the average benefit percentage) for NHCEs must be at least 70 percent of the average benefit percentage for HCEs.

Q: Are corrective excess contributions tax-free? -TOP

A: No. If an employer corrects a failed plan by distributing excess contributions (in the case of the ADP test) or excess aggregate contributions (in the case of the ACP test), then the affected employees must include those amounts as taxable income (except to the extent they represent a return of after-tax contributions).

Q: Our workforce is heavily unionized. How do I run the nondiscrimination tests?-TOP

A: A collectively bargained employer must test separately 401(k) plans that cover employees who are in a collective bargaining unit from 401(k) plans that cover employees who are not in a collective bargaining unit. In addition, the employer must test each collective bargaining unit separately even if the employees covered by the collective bargaining unit participate in a plan in which employees not covered by a collective bargaining unit (for example, salaried employees) participate. Employer and matching contributions as well as after-tax elective contributions made by employees in a collective bargaining unit are automatically deemed to pass the ACP test.

Q: Is there any way to avoid ADP and ACP nondiscrimination testing?-TOP

A: Yes, but not until 1999 plan years. When new rules (enacted as part of  the Small Business Job Protection Act of 1996) take effect in 1999, a plan that provides either a specific level of matching contribution or a minimum nonelective contribution to all eligible NHCEs for a plan year may be exempt from ADP and ACP testing. The contributions must be immediately fully vested and subject to other restrictions on withdrawals and other features. Plans maintained by public employers do not need to perform nondiscrimination tests. 

Q: -What are Annual Additions? -TOP

A: Refers to the total of all contributions allocated to the participant account(s) in all defined contribution plans and simplified employee pensions plan of the employer for the limitation year.

 Q: What is a Annual Additions Limitation? -TOP

A: A limitation imposed on the participant's account by the IRS. It limits the amount of annual contributions a participant can make to their account to $35,000 or 25 percent of their compensation, whichever is less. The limitation year as defined in the 401(k) Pro plan document is the calendar year. This means that the participant can't exceed these contribution limits during the calendar year. Participant contributions to the cafeteria plan (IRS Section 125 plans) are not applied to the Annual Additions Limitation.

Q: What is a Determination Year? -TOP

A: The determination year is used to determine income or loss with respect to either excess deferrals or excess contributions and excess aggregate contributions. In the case of excess deferrals, the determination year is the calendar year in which the excess deferrals were made. In the case of excess contributions and excess aggregate contributions, the determination year is the plan year in which such contributions were made.

Q: What is Gross Annual Compensation -TOP

A: Generally refers to all wages paid to an eligible employee during the plan year. Compensation includes: salary, overtime, bonuses, commissions, taxable reimbursements and allowances, cash and non-cash fringe benefits, moving expenses and deferred compensation and welfare benefits.

For self-employed participants, Annual Compensation refers to Earned Income as defined in the 401(k) Pro Plan Document.

 Q: What is a Key Employee? -TOP

A: As defined by the IRS, a Key Employee means any employee or former employee who at any time during the 5 year period ending on the Determination date was: 1. An Officer of the Employer with the compensation excess of 50 percent of the dollar limitation under Code Section 415(b)(1)(A) - The Officer Compensation Thresholds for the past seven years are:

· 2001…………...$70,000
· 2000…………...$67,500
· 1999…………...$65,000
· 1998…………...$65,000
· 1997…………...$62,500
· 1996…………...$60,000
· 1995…………...$60,000
· 1994…………...$59,400

2. a 5% owner or the Employer

3. a top ten owner (one of 10 employees who owns the largest interest in the Employer and had annual compensation from the Employer exceeding the dollar limitation under IRC Section 415(c)(1)(A) $35,000

4. A 1% owner, having compensation from the Employer of more than $150,000.

This definition applies when performing the compliance Top Heavy Test.

 Q: What is the Look Back Year? -TOP

A: The look back year is the twelve month period immediately preceding the first day of the plan year.

 Q: What is the Minimum Coverage Test? -TOP

A: The IRS requires the Minimum Coverage Test on an annual basis. This test ensures that an employer's plan does not discriminate in favor of Highly Compensated Employees (HCEs). This test must show that the percentage of non-HCEs who are benefiting by the plan is at least 70% of the percentage of HCEs benefiting by the plan. Here is an example of the Minimum Coverage Test:

Test: Assume 40% of the non-HCEs in the company benefit from the plan and 50% of the HCEs in the company benefit from the plan.
What is 70% of 50%?  Answer:35%
Is 40% >35%?  Answer: Yes

Test Result: Test Passes

If a plan fails the Minimum Coverage Test, the Employer must take corrective action within 9 ½ months after Plan Year end. This may require including additional employees in the plan who originally were not eligible and therefore were not benefiting employees, and proving them with an employer contribution.

 Q: What is the Top -Paid Group or 20% HCE group? -TOP

A: The top-paid group is the highest paid 20% of the Employer's employees. If you choose the Top-Paid Group (or Top 20%) option, you may be able to minimize the number of employees who are considered Highly Compensated Employees (HCEs). When using this option, all employees are ranked by compensation, and only those who fall in the top 20% and who earn greater than $80,000 in the look-back year (the 12 month period preceding the current plan year) are considered Highly Compensated.

For example, assume that ten employees work for you. One is a 5% owner, and three others earned greater than $80,000 indexed in the look-back year. When you rank all ten employees by compensation and then apply the Top 20% option, there are only two employees --instead of four-- who must be defined as HCEs. This example assumes that the 5% owner is one of the employees who earned greater than $80,000. If the 5% owner was not one of the employees who earned greater than $80,000, then you would have three HCEs - the two in the Top 20%, as well as the 5% owner.

 Q: What is the Top Heavy Test? -TOP

A: A compliance test required to determine if the plan is Top Heavy. A plan is considered Top-Heavy if more than 60% of the assets of the plan are for the benefit of Key Employees (see Key Employees in this Glossary). This calculation includes all withdrawals for the previous five years. If a plan is Top-Heavy, then the employer is required to make minimum contributions equal to the highest contribution percentage of any key employee up to maximum of 3% of compensation to all non-key employees. The plan would then require a special accelerated vesting schedule.

Q: The employer matching contribution 401(k) plan safe harbor now satisfies the top-heavy rules". Does this mean that if a 401(k)plan is a safe harbor plan using the safe harbor matching contribution, they do not need to run the top heavy test? -TOP

A: Yes. Under EGTRRA a safe harbor 401(k) plan is deemed not to be top heavy.(TAG)

Q: Can non-vested employer contributions be used towards passing the top-heavy test? -TOP

A: Yes. There is no requirement that the match be 100% vested to be used towards passing the top-heavy test minimums.

 Q: What is the new EGTRRA definition of a "key employee" for purposes of the top-heavy test? -TOP

A: A "key employee" is an employee who, during the plan year that ends on such determination date or the preceding plan year, is

(i) an officer earning compensation in excess of $130,000 (indexed for cost-of-living adjustments in $5,000 increments),
(ii) a five percent owner,
(iii) a one percent owner earning over $150,000

Q: What is the new EGTRRA definition of "officer" for top-heavy testing? -TOP

A: Officers with annual compensation greater than $130,000 for 2001 are key employees.

Q: Can an excess contribution under a plan's ADP test be "reclassified" as a catch up contribution for persons 50+ instead of distributing the excess? -TOP

A: Yes. The new proposed regulations make it clear that, if the participant is 50+ an excess contribution can be reclassified as a catch up contribution for that participant.

Q: Can top-heavy plans offer a corrective contribution that can be subject to a vesting schedule? Does our 401(k) Easy system allow for this employer contribution to be vested? -TOP

A: Yes and No--all top-heavy corrective contributions must be 100% vested immediately under 401(k) Easy. The alternative to a complex top-heavy situation is to change the plan to a Safe-Harbor 401(k).

Q: If an existing company starts a 401(k) how are the HCEs determined? -TOP

A: HCEs are persons who are 5%+ owners and/or earned $80,000+in the look-back year and was in the top 20% of employees ranked by pay.

Q: If a brand new company starts a 401(k) how are the HCEs determined? -TOP

A: HCEs are only the 5%+ owners