Is it true or false that no more than 70 officers can be treated as key employees, even if the 10 percent cap allows for more?

The correct answer is that it is false that no more than 70 officers can be treated as key employees, regardless of the 10 percent cap allowing for more. The concept of "key employees" in a 401(k) plan refers to a specific set of individuals defined under the regulations, primarily focused on their compensation and ownership stake in the company.

For a plan year, the Internal Revenue Code defines key employees as those officers who earn over a specified limit and shareholders who own a significant percentage of the company. However, while there is a cap on the number of key employees that can be considered for testing purposes, the limit is not strictly capped at 70 officers. Instead, the 10 percent cap refers to the provision that allows for designating 10 percent of the total number of employees as key employees without needing to categorize them as such across all companies. Thus, depending on the size and structure of the organization, it’s feasible for a larger number of officers to be treated as key employees than the stated limit would imply.

This nuance reveals the flexibility inherent in defining who can be classified as key employees based on the structure and size of an organization.