I've seen the thread on this message board regarding the ADP/ACP tests and HCEs with no comp and no hours What do you do if you have an HCE/Owner who took no comp for cash flow reasons but worked over 1,000 hours??? The owner of the company took no compensation for the year because of cash flow issues.

$0 comp/$0 deferrals isn't equal to 100% IMHO. The goal is to include the owner as a 0 deferral and sole member of the HCE group by invoking the top paid group. Can this be done? Anyone?

Although this situation was not contemplated in the regulations, I would say that you do not include the individual in the test. If there was no opportunity to defer (due to no income) were they really an eligible employee.

This would be the conservative approach since it would drive up the ADP of the HCE group.

I have no cite on this so let's see what others think.

It seems like a pretty sorry job if you ask me!

Joke aside, I'll keep him out anyway. For this year's test, his compensation this year is irrelevant to the HCE determination. If your using the top paid group, you have to look at the previous year's comp. So that the fact that he didn't draw any compensation in 2003 doens't matter. It will affect the 2004 HCE group though.

Also, in 2003, the document has to specify whether the plan will use the top paid group election, so if he is the only HCE and has to be excluded from the test because he has no comp, the plan is deemed to pass.

View this thread for more discussion

http://benefitslink.com/boards/index.php?showtopic=23366&hl=

PensionNewbee, you must have not liked my answer when you posted this question on the thread Archimage references.

Next time tell the owner to take a few bucks in compensation.

actually, Blinkey, I posted it there but thought nobody would see it, so I posted it as a new question. ...

does it matter or change anything if the owner/hce had compensation in 2002? He would be in the top paid group then for 2003, wouldn't he?

He is a 5% owner so he is an HCE regardless.

Isn't the first question whether he is included in the test and then the second question is whether he is an HCE or NHCE? So if he's not included in the test, it doesn't matter what his classification is?

E.g., if someone worked for a company last year making $200,000 but terminated at year end, you wouldn't put them in the test just because the HCE determination would make them an HCE for the current year would you?

Or is someone was a 20% passive owner performing no services, you wouldn't put them in the test just because they'd be an HCE would you?

Sorry for the confusion. We had already answered those questions in previous posts. I was trying to point out that the rationale for the top paid group assumption was incorrect.

I know he's an HCE - it's my ineptitude in phrasing questions that led to the confusion. As an owner, he's in the top paid group, regarless. Sorry about that.

That statement needs clarification. Just because someone is a >5% owner does not mean he/she is in the top paid group.

as the sole owner, meaning 100%, he would be in the top paid group, wouldn't he? He worked full time, but took no salary.
The question is, is he included in the test or not?
Most posts say to exclude this person from the test.
However, to exclude this person from the test means that there is one other HCE with comp and deferrals, and the plan fails the test.
Any suggestions?

Top paid group only has to do with compensation. See he has no compensation then he can't be in the top paid group. However, he is an HCE because of his ownership.

He is excluded. You will have to correct with refunds or QNECs.

client won't go for that. No refunds, no QNEC. I do feel a bit caught between a rock and a hard place on this one.

If your document allows for it, you can do a bottom-up QNEC which could be very cheap for the client.

As Blinky noted, he should have taken some compensation! Show them you're being proactive: Check to see if there is something that might be considered compensation under the terms of the plan. E.g., was there a little personal use of a company vehicle that could be W-2'd...and then considered as compensation for plan purposes? But then the owner might not like getting that W-2...and decide the other HCE should just get a refund.

He doesn't have a choice if he was to keep his plan in compliance.

If he doesn't want to keep his plan in compliance, my suggestion is you fire him as a client, you really don't need that, because he will come back and blame you when the IRS catches up with him.

Pesionnewbie, forgive me if I have misunderstood, but did you ever state that another employee had a prior year salary >90,000? Something about the post makes me think that you are thinking that the plan is required to have at least one HCE and that is no longer true. If there are no employees that are >5% owners or prior year salary >90,000 (AND in the top paid group, if in the plan document), then there are no HCE's.

I may have misread your question, but I gathered that you were using OR rather than AND when referring to the top paid group.