To prevent discrimination in savings plans, Section 401(m) imposes tests that effectively limit contributions by highly compensated employees
(discussed under "Tax Implications," below).
If the plan discriminates in operation (e.g., a highly compensated employee
is eligible for twice the benefit available to nonhighly compensated employees), the recipient highly compensated employee
will have to include the entire amount of excess reimbursement actually received in income-whether or not coverage requirements are met.
Highly compensated employees
at nonprofits can adopt this plan as of the first of any month.
The simplified rules will make it much easier for companies to determine who is a highly compensated employee
in testing to determine whether a retirement plan meets nondiscrimination requirements.
The average benefits provided to nonhighly compensated employees must be at least 55% of average benefits provided n ) highly compensated employees
A plan provision that credits pre-participation service or imputed service to any highly compensated employee
will be considered nondiscriminatory if, based on all the facts and circumstances: (1) the provision applies on the same terms to all similarly-situated nonhighly compensated employees, (2) there is a legitimate business purpose for crediting the service, and (3) the crediting of the service does not discriminate significantly in favor of highly compensated employees
(1) This limits the relative amount of funding for highly compensated employees
. For older employees, a defined benefit plan may allow a much higher level of employer contributions to the plan, as discussed further under "Design Features," below.
By contrast, if the trust is discriminatory, highly compensated employees
(as described in Sec.
Among those employees who can benefit from the plan are officers, shareholders, highly compensated employees
, and the spouses or children of owners or highly compensated employees
who are employees of the same company.
(6) A highly compensated employee
, for this purpose, is one who is an officer, a shareholder owning more than 5% of the employer, a highly compensated employee
, or the spouse or dependent of any of these.
When new notice and consent requirements (discussed below) are met, the income-inclusion rule does not apply if the insured was an employee during the 12-month period before the insure& death or, at the time the contract was issued, was a "highly compensated employee
" or a "highly compensated individual" (This group includes greater-than-5% owners, employees earning over $100,000 in the preceding year, directors, or any employees in the top 35% of employees ranked by pay.) In addition, the rules do not apply if the death benefits are paid to the insured's family, any individual designated by the insured (or to trusts for the benefit of either), or the insured's estate, or if the proceeds are used to purchase an equity interest in the company that owns the policy.
401(a) (17), $210,000 $205,000 404(l), 408(k)(3) (C) and 408(k) (6) (D) (ii)] Definition of highly compensated employee