True or False: Current year compensation is considered in the HCE determination process.

The determination of Highly Compensated Employees (HCEs) is crucial in administering a 401(k) plan, particularly when it comes to ensuring compliance with nondiscrimination testing requirements. Current year compensation is indeed taken into account when identifying HCEs.

HCEs are defined as individuals who received compensation above a certain threshold during the preceding year or who owned more than 5% of the business at any time during the current year or the preceding year. The use of current year compensation allows for the most accurate representation of an employee's earnings, reflecting any recent salary increases or performance bonuses that may have affected their overall compensation for the year. This approach ensures that the determination of whether an employee qualifies as an HCE is based on the employee's latest financial status, thus maintaining fair and compliant 401(k) plan practices.

Understanding this aspect is fundamental for plan administrators, as misclassifying HCEs could lead to compliance issues with ERISA regulations and incorrect plan operations related to contributions and benefits.