Lecture 27 Plan Restrictions Aimed at Highly Compensated EmployeesWho is an HCE?Compensation CeilingLimitation on Individual Benefits in a Defined Benefit PlanLimitations on Annual Additions in a Defined Contribution PlanTop-Heavy PlansEarly Termination Rule for 25 Highest Paid EmployeesFederal Estate Tax ProvisionsLecture 27Plan 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 provisionsWho is an HCE?•5% owner of the firm•Officer•Compensation (employer choice) –in excess of $80,000 (indexed) –in top 20% of organizationCompensation Ceiling•Only the first $150,000 (indexed) of compensation is taken into account in a qualified planLimitation 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 70Limitations 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 contributionsTop-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 requirementsEarly 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 terminationFederal 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