In order to qualify for tax-favored status, a benefit plan must not discriminate in favor of highly compensated employees (HCEs) and key employees with respect to eligibility, contributions, or benefits. The Federal government has established regulations that specify requirements for each type of benefit plan governed by IRC Section 125, IRC Section 105, and IRC Section 129. In order to evidence compliance annual tests must be performed and the results documented for each benefit plan. The results are subject to audit by the IRS. American Benefits Group offers a comprehensive process for executing these tests.
A Key Employee is one who in the prior plan year* met one or more of these criteria:
- An officer of the company earning $175,000 or more annually;
- A 1% owner with a salary of $150,000 or more; and,
- A 5% (or more) owner regardless of salary.
*If your plan is in its first year, use the current plan year for determining Key Employees.
The Plan may not favor Highly-Compensated Employees (HCEs). An HCE for Plan Years through 2018 is defined as:
- An officer in the prior year;
- A 5% (or greater) shareholder in the current or prior year;
- An employee paid $120,000 or more in the prior year; and,
- An employee whose salary is in the top 20% of all employees.
2019 Plan Year
Looking ahead to 2019 plan year definitions, the Key Employee salary criteria increases to $180,000 while the salary for HCEs rises to $125,000.