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October 21, 2011

Question of the Week: What Are the 2012 Highly Compensated Employee Limits?

What Are the 2012 Highly Compensated Employee Limits?
What Are the 2012 Highly Compensated Employee Limits?
This week’s question comes from Carla, a company president.

Carla asks:

We’re doing some compensation planning for next year. What are the 2012 Highly Compensated Employee Limits?

Answer: The IRS has just released updated information for 2012.

IRS Releases 2012 Highly Compensated Employee Limits in IR-2011-103

In IR-2011-103, the Internal Revenue Service (IRS) announced that for 2012 the Highly Compensated Employee Limitation under §414(q)(1)(B) of the Internal Revenue Code of 1986 will increase to $115,000. Non-discrimination testing in some types of retirement plans limits the deferral rate of “highly compensated employees” (HCEs) based upon the deferral rate (ADP) of the “non-highly compensated employees”.

Highly Compensated Employee Compensation Limit Had Been $110,000

For 2012 plan year testing, an HCE is anyone who was a “5-percent owner” at any time during 2011 or 2012 or anyone who received in excess of $110,000 in compensation during 2011 and, if elected by the employer, is in the top twenty percent of employees based upon compensation. The HCE limit was also $110,000 for 2010 and 2011 plan year testing. The new $115,000 limit for 2012 is to be used for 2013 plan year testing.

Look-back Provision Impacts HCE Testing Period

Since the law includes a look-back provision, employees who earned more than $110,000 in 2010 are generally considered HCEs for 2011 plan year testing, employees who will earn more than $110,000 in 2011 are generally considered HCEs for 2012 plan year testing, and employees who will earn more than $115,000 in 2012 are generally considered HCEs for 2013 plan year testing.

Contact Vision Payroll for More Information on HCEs

Contact Vision Payroll if you have questions on changes to the HCE definition for 2012 to be used in 2012 plan year testing or get further information at Important Facts and Figures.

2 Comments »

  1. Above you have “For 2012 plan year testing, an HCE is anyone who was a “5-percent owner” at any time during 2011 or 2012”

    shouldn’t this read “who was MORE than a 5-percent owner”?

    Thanks

    Comment by carrie — March 24, 2012 @ 3:43 pm

  2. The phrase “5-percent owner” is used in 26 USC 414(q)(1)(A) and is a term of art. It is defined in 26 USC §414 as follows: “[a]n employee shall be treated as a 5-percent owner for any year if at any time during such year such employee was a 5-percent owner (as defined in section 416(i)(1)) of the employer.” A thorough reading of 26 USC §416 shows that a “5-percent owner” might own 5 percent, 100 percent, or even 0 percent. So, no, it should not say, “who was MORE than a 5-percent owner.”

    One must be careful to not necessarily give a phrase in tax law (or any area of law) the same meaning it might have in ordinary written and spoken English. Only a thorough reading of the tax code, regulations, related cases, etc. can give one the meaning of terms of art. Therefore, we highly recommend that businesses and individuals consult tax and legal advisors when such questions arise.

    Comment by Vision — March 25, 2012 @ 11:19 am

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