Discrimination
The
plan must be available to employees who qualify under a classification
established by the employer and which the IRS determines as not
discriminating in favor of highly compensated or key employees.
One
discrimination test which impacts greatly on smaller employers is the 25%
rule. The benefits or amount deferred by the key employee group may not
exceed 25% of the total amount deferred by all employees. If this rule is
violated, the deferrals of the key employees are treated as taxable
income defeating the purpose of the plan for them. There is no effect on
rank and file workers.
Key
participants are any participants and participants' beneficiaries who,
during the determination year:
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are or were an officer of the sponsoring employer and earning more
than $130,000 2;
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owned more than 5% 3 of the employer; or
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owned more than 1% 3 of the employer and received
more than $150,000 of compensation from the employer. |
1
In‑service distributions are subject to a five‑year look‑back period.
2
This value applies to 2002.
3
The family attribution rules
of IRC Sec. 318 apply. Any participant is deemed to have the same
ownership share as his or her spouse, children, parents and grandparents.
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