Retirement A to Z

Episode H - Highly Compensated and Key Employees

February 08, 2020 Sue Burnett Season 1 Episode 8
Retirement A to Z
Episode H - Highly Compensated and Key Employees
Show Notes Transcript

Highly Compensated and Key employees are critical to the success of a business. Would a qualified plan help attract, and retain, them? How are they treated differently than normal rank and file employees? Doesn’t it cost more for them, since they’re paid more? Should they be in the plan at all? If not, won’t that make them quit? What if you give them a pension contribution instead of a bonus? Let’s talk it through.

Welcome to Retirement Plans A to Z, I’m Sue Burnett w Monarch Financial Advisors, and we’re going to break down these complex things called qualified retirement plans into smaller pieces – 26 pieces, to be exact, from A to Z, with maybe a few extras thrown in. This episode focuses on the letter H: Highly Compensated Employees (HCEs) and key employees. Does a qualified plan help attract and retain them? How are they treated differently than normal rank and file ees? Doesn’t it cost more for them, since they’re paid more? Should they be in the plan at all? If not, won’t that make them quit? Let’s talk it through.

Episode H – High Paids and Keys. Highly compensated ees (I’ll shorten this to HCE for the podcast) and key ees have specific definitions from the IRS

·       IRS defines a HCE as someone meeting 1 of 2 criteria: Owned more than 5% in current year or prior year, regardless of pay, OR were paid more than a certain amount in the prior year – for 2019, this amount was $125k, and for 2020, it’s $130k. If the ER has a lot of people over this compensation threshold, can limit # of HCEs to the top 20% of ees. 

·       FF: avg CEOs in US make around 12M, highest paid CEO in US is at 103.2M – head of a global supplier of semiconductor technologies. Highest paid person in world in 2019 was Jeff Bezos, founder of Amazon - NW almost 154B, with a B. Knocked off Bill Gates, who was #1 for a number of years, and he was the first person to ever reach the $100B mark. 

·       A KEY ee is defined as someone who meets one of 3 criteria: officer making over a certain amount ($180k for 2019), owns more than 5% of business, or owns 1% and earns over 150k. 

·       HCEs and Keys are obviously important to a business, otherwise they wouldn’t be paid what they are or have ownership in the co. These are the ees you want to get in the door, and to stay there. A QP can help attract, and retain, these employees – less than 1/3 of businesses with less than 100 employees have a qualified plan, so having one may set your business apart from the others and may be the tipping point to bringing top talent in. Once they’re in, vesting provisions would require them to work for a set # of years in order to be eligible for the entire benefit (more details on vesting in Ep V). Treated differently with regard to the various tests of the plan that we have to do - there are tests that we need to do in order to make sure the rank and file ees are receiving enough relative to the owners and HCEs. Always give owners HCEs less; can always give rank and file more -up to limits. Make sure owners don’t get more than they should. 

·       FF: country w highest avg income is Luxembourg, at just over 63k. US came in 4th – country w lowest avg income is Malawi, at around $250 USD per year. 

·       Only time keys are treated differently than non keys is when it comes to our top-heavy test. Plus, most keys are also HCEs – so we’ll focus on HCEs for the rest of our discussion.

·       HCEs are included with owners in our tests for number of employees covered, as well as amounts. The more that’s given to an HCE, the more that the employees may have to get. If the HCes were excluded from the plan overall, this may lowers the cost for the rank and file employees (and may also reduce the # of rank and file ees that are needed to be covered). 

·       So – would it be better, then, to exclude all the HCEs that aren’t owners?

·       That depends – if you’ve used QPs to attract these ees, excluding them would likely not go over very well. Excluding them, though, would likely reduce the overall cost of the ees, which increases the percentage of the total going to the owners. One strategy is to allow partners, or some other high-paid job class, into the plan, but exclude jr partners, or whatever job class is right before. Gives a carrot, incentive, to move up to that next level and get add’l benefit. The IRS is fine w the plan excluding them – remember, always give owners HCEs less, giving them $0 is fine. 

·       Including them- cost more, yes, but avoid discussions as to why they aren’t in. Also, if they’re paid a bonus, consider putting bonus in plan as contrib instead of paying them outright – no payroll / social security tax paid w QP contrib, and vesting schedule applied (vs a bonus, where once it’s paid, it’s theirs). May be worth it to include these ees, but certainly can exclude them.

·       Final FF on pay is an int’l one – the strongest currency in the world in 2019 is the Kuwaiti Dinar, where 1 Dinar equals 3.29 USDs. This is followed by the currencies in Bahrain, Oman, Jordan, and Gt Britain.

·       Wrapping it all up – HCEs and Keys are extremely important to a business, and a QP plan can help attract and retain them. But should you include them in the plan? Dep on what you as owner are trying to accomplish, what goals and obj of the plan are. We can help you sort through it all, determine how to treat your important employees with regards to the benefits in your plan and what the cost, pros, and cons would be. 

·       Want to hear more? The other episodes mentioned here are  V (Vesting)

·       Have any questions? Shoot me an email at MRS@gmail.com. Thanks for listening in – and have a great rest of your day.