340 / Who is a highly compensated individual for determining whether a health plan is discriminatory?

(1)     The employee is one of the five highest paid officers;

(2)     The employee is a shareholder who owns, either actually or constructively through application of the attribution rules ( Q 301), more than 10 percent in value of the employer’s stock; or

(3)     The employee is among the highest paid 25 percent, rounded to the nearest higher whole number, of all employees other than excludable employees who are not participants and not including retired participants.¹ Fiscal year plans may determine compensation on the basis of the calendar year ending in the plan year.

Planning Point: These requirements are not mutually exclusive. The five highest paid officers may also be among the highest paid 25 percent of all employees. However, if one of the top five officers is not in that pay range, that officer still needs to be included in the highly compensated individual category.

A participant’s status as officer or stockholder with respect to a particular benefit is determined at the time when the benefit is provided.²

1.     IRC § 105(h)(5).

2.     Treas. Reg. § 1.105-11(d).