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Top-Paid Group
Practical Law Glossary Item 9-501-8651 (Approx. 3 pages)
Glossary
Top-Paid Group
For purposes of determining a highly compensated employee under the Internal Revenue Code during any given year, the top 20% of employees ranked on the basis of compensation received during that year. The employer must make an election for the top-paid group rule to apply.
The following employees may be excluded from a determination of the top-paid group:
- Employees who have not attained age 21 by the end of the plan year.
- Employees who have not completed six months of service at the end of the plan year.
- Employees who normally work less than 17½ hours per week.
- Employees who generally work less than six months per plan year.
- Union employees, subject to some special restrictions.
- Nonresident aliens with no U.S.-source income.
For these exclusions, the employer may elect to substitute a lower age, shorter service period, or fewer number of hours per week or months per year, so long as the reduced requirement is applied in a uniform fashion. (IRC § 414(q)(5), Temp. Treas. Reg. § 1.414(q)-1T, Q&A 9(b)(i), (ii), and IRS Notice 97-45). For more information on the nondiscrimination rules, see Practice Note: Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Nondiscrimination Rules and Highly and Non-Highly Compensated Employees.
For model language to be included in a qualified plan, see Standard Clause, Plan Language, Definition of Highly Compensated Employee.