KEY EMPLOYEES & HIGHLY COMPENSATED EMPLOYEES
(for plan years effective on or after 1/1/02)
Testing Rules and Definitions for FSA Plans
Each type of benefit available or provided under a cafeteria plan is
subject to the overall cafeteria plan nondiscrimination rules.
Eligibility Test (Safe Harbor)
The plan may not discriminate in favor of highly compensated individuals
as to eligibility to participate.
Overall Concentration Test
Aggregate benefits provided to key employees under the entire cafeteria
plan may not exceed 25% of the aggregate benefits provided to all
eligible employees. This includes employee and employer premium payments
as well as pre-tax deferrals to health care and /or dependent care
expense reimbursement accounts. (DOES NOT APPLY TO GOVERNMENT PLANS).
A key employee is an employee (include former or deceased employees),
who at any time during the prior plan year was:
officer whose annual compensation from the employer exceeds $130,000;or
2. an employee owning more than 5% of the business; or
employee owning more than 1% of the business, and whose compensation
exceeds $150,000 for the plan year.
is an explanation of the FOUR KEY EMPLOYEE
For an officer to be considered a key employee,
the officer must be an officer-in-fact and not merely an officer-in-title.
An excerpt from the Tax Equity and Fiscal Responsibility Act (TEFRA)
committee report explains the guidelines: ...the determination as
to whether an employee is an officer is to be determined upon the
basis of all the facts and circumstances, including, for example,
the source of the employee's authority, the term for which elected
or appointed, and the nature and extent for the employee's duties.
As generally accepted in connection with corporations, the term "officer"
means an administrative executive who is in regular or continued service.
It implies continuity of service and excludes those employed for a
special and single transaction, or those with only nominal administrative
duties. Thus, for example, all the employees of a bank who have the
title of vice president or assistant vice president would not automatically
be considered to be officers.
of officers-in-fact to be considered key employees is limited to the
greater of 3 officers or 10% of the employees. No more than 50 officers
will be considered key employees, regardless of the number of employees.
If there are more officers-in-fact than the numerical limit, the officers
with the highest compensation will be considered key employees.
An employee who is a 5% owner or greater is a key
An employee owns a 5% or greater interest in a corporate employer if
the employee owns 5% or more of the employer's outstanding stock or
stock possessing 5% of the total combined voting power of all stock
of the employer. An employee is also treated as owning stock owned by
certain members of the employee's family or, in certain cases, by partnerships,
estates, trusts, or corporations in which the employee has an interest.
Family members whose ownership is attributed to the employee are parents,
spouses, children and grandchildren.
A more than 1% owner with compensation greater than $150,000 is a
Ownership is determined by the above rules.
HIGHLY COMPENSATED EMPLOYEES:
Generally, the term 'highly compensated employee'
a shareholder owning (directly or through related individuals such
as spouses and lineal ascendants of descendants) more than 5% of the
voting power or value of the employer; or
any person who during the preceding year was an employee who received
compensation of at least $90,000; or
a spouse or dependent of any of the foregoing.
generally, this is the total number of employees of the employer, (including
part-time employees), less the following permitted exclusions:
bargained (union) employees, if the option to participate in the
plan was part of the collective bargaining process, and the union
group is not allowed to participate in the plan because the group
declined the option to participate, then the group can be excluded
for purpose of the benefits test.
who have not met minimum age or service requirements to participate
in the plan as stated in the Plan Document, can be excluded. Please
note that the service requirement cannot exceed one year and the age
requirement cannot be higher than 21. If the plan does not have an
age or service requirement, those under age 21 or with less than one
year of service cannot be excluded from this number.
should only be included in this number if they are employees of the
Eligible 'Non-excludable' Employee
plan's eligibility definition, determine whether there are 'non-excludable'
employees who are not eligible to participate in the plan. Remove all
of those employees that are not eligible and the remaining number should
reflect all employees eligible for the plan. It should be equal to or
less than the number of 'non-excludable' employees. (Note: the exclusions
available under the 'non-excludable' employee determination are available
under the same conditions for this determination.)
Includes all companies or entities that are part of a controlled
group of corporations or an affiliated service group.
The top 20% of employees ranked on the basis of compensation during
the preceding plan year. In calculating 20% of employees, you may
exclude employees who:
less than 17 1/2 hours per week,
less than 6 months of service,
less than 6 months per year,
members of a collective bargaining agreement not included in the plan,
are less than age 21 at the end of the year.