In general, a Highly Compensated Employee can be defined as any employee who is a more-than-five-percent owner of the business in the year of testing, or the preceding year, and/or employees with compensation at or above the amount indexed periodically by the IRS. The five percent owner rule applies to certain family members such as spouses, parents, children, and grandchildren (who work for the company regardless of pay level) because they are deemed through their relationship to share in ownership (Family Attribution).
Defined as an employee who does not meet the above criteria of a Highly Compensated Employee.
Compares the contribution rates of Highly Compensated Employees and Non-Highly Compensated Employees to determine if such contributions were discriminatory in favor of the Highly Compensated Employees. The ADP and ACP tests must be satisfied in order for a plan to remain qualified and eligible for favorable tax status.
A plan will typically be considered as top heavy if more than 60 percent of the total plan assets (both vested and non-vested) are for the benefit of "key" employees. If a plan becomes top heavy, non-key employees will be entitled to certain "top heavy minimum benefits" and other special rules will apply.
A key employee is any employee who, at any time during the plan year, is:
Non-Highly Compensated Employee
Actual Deferral Percentage Test (ADP) & Actual Contribution Percentage Test (ACP)
Top Heavy
Key Employee
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