I have an LLP that has a 401k plan (6/30 PYE).

1. One of the partners (owns 1.5% of the partnership) had a compensation amount of $90,500 BEFORE contribution adjustments in 6/30/2001. After adjustments compensation was $83,000. Is this partner considered an HCE for 6/30/2002?

2. The majority partner's (37%) spouse is now working for the LLP. Is she considered an HCE and key for testing purposes? If yes, is her comp adjusted by contributions as well?

Thanks for any help.

Oh, don't you just love it? Off plan years kill me!

The look-back year compensation is $83,000, and the look-back year began in the 2000 calendar year (7/1/2000 - 6/30/2001). The calendar year is what we're looking at to determine the compensation amount that determines an HCE. In 2000, the compensation that defined an HCE was $80,000. Therefore, the participant is an HCE for the PYE 6/30/2002 by virtue of his compensation, though not his ownership.

As for the spouse, yes, she is an HCE and a Key employee.

As for adjusting her compensation, it depends on whether or not her compensation is "partnership income," or her income is "payroll." Does she receive a W-2 from the firm, or does the accountant prepare a form K-1 on her behalf?

Thanks LWilson!

The spouse receives a W-2 so that answers that question for me!

I appreciate your quick response.

Oops! I read your response again and the HCE comp limit for 2000 was $85,000. I guess this means this owner is NOT an HCE for the plan year beginning 7/1/2001.

Effie,

Does the plan document exercise the top-paid group election for HCE determination? If so, then the 1.5% partner may not be an HCE. Just food for thought to make sure all bases are covered.

Oops! Sorry - I'm glad you caught it. How embarrassing!

Jaemmons - top 20% would definitely keep this partner out of the HCE group, even if I were to use her comp BEFORE deductions. I will definitely make this election to cover all my bases.

LWilson - no problem! Like you said - off years are killers!

Thanks for the help.