Question

XYZ covered the following employees under its qualified plan. Rob, a 4% owner and employee with compensation of $32,000. Robin, Rob's cousin, a commissioned salesperson with compensation of $195,000 last year (the highest paid employee). Robin owns 2% of the company stock. Randy, the chief operating officer, who had compensation of $160,000 last year, but was not in the top 20% of paid employees. Assuming the company made the 20% election when determining who is highly compensated, which of the following statements is correct? a. Randy is a key employee, but not a highly compensated employee. b. Robin is a key employee, but Rob is not. c. Neither Rob, Robin, or Randy are highly compensated employees or key employees. d. Rob and Robin are both key employees.

Answer 1

b. Robin is a key employee, but Rob is not.

Step-by-step explanation:

The IRS defines key employees as anyone that meets at least one of the following during 2020:

1. owns 5% f the company that sponsors the qualified plan.
2. owns 1% of the company that sponsors the qualified plan and has a salary of at least $150,000 per year.
3. An employee that makes at least $185,000 per year.

A highly compensated employee is anyone that:

1. owns 5% of the company that sponsors the qualified plan.
2. makes at least $130,000 per year.*

*In this case, Randy is not considered a highly compensated employee (HCE) because the company only considers employees earning salaries in the top 20% to be so.