Corporations X and Y constitute a management affiliated service group as defined by Code § 414(m)(5). Corporation X sponsors a new comparability plan. Participation in X's plan has not been extended to employees of Corporation Y. Smith is an employee of Corporation Y and owns 7% of Corporation Y's stock. Smith, if employed by Corporation X, would be a participant in X's plan. For purposes of the ratio percentage test, Smith will be treated as a nonexcludable, nonbenefitting employee. However, is Smith an HCE or not? Smith owns 7% of Corporation Y, but owns no part of the plan sponsor, Corporation X. Thanks in advance for your thoughts.

He owns more than 5% of a related member. That makes him an HCE.

I have always wondered does he own 7% or 3.5%? He owns 7% of 200%, doesn't he?

Thanks

No, he owns 7% for HCE determination purposes.