Lecture 27 Plan Restrictions Aimed at Highly Compensated Employees Who is an HCE? Compensation ceiling Limitations on individual benefits Limitations on annual additions Top-Heavy plans Early termination rule for top 25 employees Federal estate tax provisions

Who is an HCE? 5% owner of the firm Officer Compensation (employer choice) in excess of $80,000 (indexed) in top 20% of organization

Compensation Ceiling Only the first $150,000 (indexed) of compensation is taken into account in a qualified plan

Limitation on Individual Benefits in a Defined Benefit Plan At age 65 (or Social Security retirement age if later) the maximum annual benefit is the lower of: 100% of average compensation in 3 highest years $90,000 (indexed) Adjustments for earlier or later retirement $42,400 at 55 $155,843 at 70

Limitations on Annual Additions in a Defined Contribution Plan Contribution cannot exceed lesser of: 25% of participant’s compensation $30,000 (indexed) Contributions include: Employer contributions Employee salary reductions Reallocated forfeitures Nondeductible employee contributions

Top-Heavy Plans Any plan where the present value of accumulated benefits for key employees is more than 60% of the present value of all accumulated benefits Key employee Officer earning more than 50% of defined benefit limit Employee owning one of 10 largest interests Owner of more than 5% Owner of more than 1% and earning more than $150,000 Additional rules Vesting Minimum benefit requirements

Early Termination Rule for 25 Highest Paid Employees Applies to benefits paid out within 10 years of a defined benefit plan’s establishment Restricts employer contributions to the greater of: $20,000 20% of first $50,000 of compensation times the number of years plan in effect prior to payment or termination

Federal Estate Tax Provisions Included in estate for tax purposes: A lump sum death benefit Present value of an annuity payable to a beneficiary from a qualified plan