Scenario:
I am testing the plan year 1/1/02 - 12/31/02. The plan has elected to use the top 20% rule to determine HCE's beginning 1/1/2002. Is this correct in calculating the HCE group?

I look at the population for year 2001. The number of EE's is narrowed down to 25. Thus, 20% of that is 5 EE's in the HCE group. I look at the salary, from highest to lowest and take the top 5, as long as they made over 85K for the 2001 year. After I narrow it down to those EE's, I still have 1 employee who is the father of a 63% owner. He needs to be coded an HCE as well, correct? Although that is greater than 5 EE's, I don't think you can remove the lowest paid guy of the first group, can you?

I know that it sounds confusing, but any feedback would be appreciated.

The top paid election only applies to determining HCE's via the compensation criteria. How about a little example.

A - 50% owner, comp 50,000
B - 50% owner, comp 150,000
C,D,E,F - comp each 120,000
G,H - comp each 100,000

So, using your determination of 5 people in the top paid group, your HCE's would be as follows:

A - owner
B - owner & compensation
C,D,E,F - compensation

G,H - NHCE's because of the top paid election.