What does highly compensated employee mean

Profit-Sharing Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan out of profits or otherwise.

The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a k feature.

Rollover — A rollover occurs when a participant directs the transfer of the money in his or her retirement account or IRA to a new plan or IRA. Safe Harbor k — A safe harbor k is similar to a traditional k plan, but the employer is required to make contributions for each employee.

The safe harbor k eases administrative burdens on employers by eliminating some of the rules ordinarily applied to traditional k plans. Savings Incentive Match Plan for Employees of Small Employers SIMPLE — A plan in which a business with or fewer employees can offer retirement benefits through employee salary reductions and employer non-elective or matching contributions similar to those found in a k plan.

While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately percent vested in both. Self-Employed Individual - An individual in business for himself or herself, and whose business is not incorporated, is self-employed.

Sole proprietors and partners are self-employed. Self-employment can include part-time work. If the employer meets certain conditions, it isn't subject to the reporting and disclosure requirements of most retirement plans. Summary Plan Description — A document provided by the plan administrator that includes a plain language description of important features of the plan, for example, when employees begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when payment is received and in what form, and how to file a claim for benefits.

Participants must be informed of material changes either through a revised Summary Plan Description or in a separate document called a Summary of Material Modifications. Years of Service — The time an individual has worked in a job covered by the plan. It is used to determine when an individual can participate and vest and how they can accrue benefits in the plan. Generally, a Year of Service requires that an employee accrues at least 1, hours of service over a consecutive-month period.

Home Retirement Plans Definitions. The lookback year is still the month period immediately preceding the first plan year January 1 to December 31, However, the compensation that is taken into account for the lookback year is the compensation that was paid during the 6 month period that Corporation X was in business.

An employee is an HCE if he or she is an employee during the short plan year and his or her compensation during the month period immediately preceding the plan year lookback year exceeded the dollar limitation under IRC Section q 1 for the lookback year. Example 8: A retirement plan has an October 1 to September 30 plan year.

Effective October 1, , the plan is amended to change to the calendar year effective January 1, There is a short plan year that begins on October 1, , and ends on December 31, The plan sponsor does not make the top-paid group election.

More In Retirement Plans. IRC Sections and Treas. Section 1. Compensation Test — General Rule Initial plan year: An employee is an HCE if he or she is an employee during the initial plan year and his or her compensation during the month period immediately preceding the plan year lookback year exceeded the dollar limitation under IRC Section q 1 for the lookback year. Short plan year: An employee is an HCE if he or she is an employee during the short plan year and his or her compensation during the month period immediately preceding the plan year lookback year exceeded the dollar limitation under IRC Section q 1 for the lookback year.

The IRS defines a highly compensated employee as someone who meets either of the two following criteria:. It also includes overtime, bonuses, commissions and salary deferrals made toward cafeteria plans and k s. It also covers ownership attributed to your spouse, children and grandchildren working for the same company. Factor in an employer match and you could be looking at major tax-advantaged savings. Each year, employers run the k plans they sponsor through non-discrimination tests.

As you can see, how much you should contribute to your k depends heavily on how much non-HCEs are contributing and how many are even participating at all. Companies have until March 15 to conduct this test for the previous year. If so, your firm would most likely refund you the excess contributions you made.

This will count as taxable income. So it could increase your tax liability for the current year. Plus, the money coming back out reduces the tax-savings and earnings potential of your k. So you may want to set some cash aside to cover a potential tax hike. Or you can make an estimated tax payment. And at some points it may be best to hold off on reaching your k maximum contribution until you know whether you will face restrictions.

When it comes to a k , you can still contribute as much as your employer would allow HCEs to contribute without penalty.