An owner is any individual who holds a direct or indirect ownership interest in a company. Ownership status is important for 401(k) nondiscrimination testing, as it helps determine whether an employee is classified as a Highly Compensated Employee (HCE) and impacts nondiscrimination testing.
An employee is considered an owner if they:
- Own more than 5% of the company in the current or prior plan year, regardless of compensation.
- Own 1% or more of the company and earn more than the IRS-defined compensation threshold for key employee classification, which is $230,000 for 2025.
The IRS attributes ownership to certain family members, meaning an employee may be considered an owner even if they do not directly own company shares. Ownership is attributed to:
- Spouses
- Parents
- Children
- Grandparents
For example, if an employee’s parent owns 100% of the company, the employee is also considered a 100% owner for nondiscrimination testing purposes.
Ownership status must be accurately classified to:
- Determine HCE vs. Non Highly Compensated Employee (NHCE) status for nondiscrimination testing.
- Identify key employees (KEs) for top-heavy testing (which impacts employer contribution requirements).
- 401(k) Plan compliance with IRS rules and avoiding discrimination or top-heavy testing failures.
Ownership details must be accurately reported in the compliance questionnaire census, including:
- Direct ownership percentage.
- Any ownership attributed through family relationships.
- Changes in ownership from the prior year.
Ownership must be accurately reported in the compliance questionnaire census. Proper reporting helps to ensure testing results are correct and that the employer meets IRS compliance requirements.
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