On what basis is the HCE determination made for related employers?

The determination of Highly Compensated Employees (HCEs) for related employers is made on a related group basis. This approach considers the compensation and ownership interests across the entire controlled group or affiliated service group rather than examining each entity individually.

When evaluating HCE status, the IRS defines it as an employee who owns more than 5% of the company or, for the previous year, had compensation above a specified threshold. For employers that are considered related under the IRS rules, such as those entities under common control or ownership, it becomes essential to evaluate the compensation and ownership together. This will ensure compliance with nondiscrimination rules and help address any issues with the 401(k) plan's qualification status.

The aggregate consideration is necessary because it provides a complete view of an employee's compensation and allows for accurate categorization of HCEs across interconnected businesses. In summary, the focus on related groups ensures that the financial interests of employees are assessed comprehensively, maintaining fairness in benefit offerings within affiliated businesses.