1. 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

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

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

4. 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

5. 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

6. 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

7. 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

8. 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