13.4 Former HCEs, Short Plan Years & Non-Calendar-Year HCE Determination

When the Calendar Stops Being Simple

Determining HCEs in a calendar-year plan is arithmetic: more-than-5% owner in the current or prior year, or compensation in the lookback year above the threshold. Once the plan year is not the calendar year, or the plan has a short year, or a former employee appears in a test, the mechanics get specific — and that is exactly where QKA-2 tests them.

Two Different Years, Always

For the 2026 calendar plan year, the lookback year is 2025 and the applicable threshold is the one in effect for 2025 — $160,000. Per IRS Notice 2025-67 the §414(q)(1)(B) threshold remains $160,000 for 2026, so 2027 determinations will look back at 2026 compensation against $160,000 as well unless the figure is later adjusted.

The ownership test does not use a lookback. A more-than-5% owner is an HCE if they own more than 5% at any time during the determination year or the lookback year — and there is no compensation requirement attached to it. A 6% owner earning $30,000 is an HCE.

Non-Calendar Plan Years and the Calendar-Year Data Election

Consider a plan year running July 1, 2026 – June 30, 2027.

• Default rule: the lookback year is July 1, 2025 – June 30, 2026. The administrator must accumulate compensation across two payroll years, which recordkeeping systems handle poorly.
• Calendar-year data election: the plan may elect to treat the calendar year beginning in the lookback year as the lookback year — here, calendar 2025. This lets the administrator use clean W-2 data.

Rules governing the election:

1. It must be stated in the plan document and applied consistently across all plans of the employer for determination years beginning in the same calendar year.
2. It applies to the compensation test only. The more-than-5% owner test always uses the actual determination year and actual lookback year — never the calendar-year substitute.
3. If the plan also makes the top-paid group election, the two elections must be used consistently together.

Worked example. Fairmont Group sponsors a July–June plan and has made the calendar-year data election. For the plan year beginning July 1, 2026:

Employee	2025 calendar compensation	Ownership	HCE for 7/1/2026 plan year?
Nadia	$172,000	0%	Yes — 2025 comp exceeds $160,000
Owen	$141,000	0%	No
Priya	$48,000	7%	Yes — more-than-5% owner; compensation is irrelevant
Quinn	$205,000	0%, hired March 2026	No — Quinn had no 2025 compensation from this employer, so the lookback test cannot be met. A new hire is not an HCE in their first year on the compensation test.

Quinn is the classic trap. A brand-new executive earning $205,000 is not an HCE in their first year, because HCE status on the compensation test depends entirely on lookback year compensation. Only the ownership test can make a first-year employee an HCE.

Short Plan Years

Two different rules apply to two different numbers, and candidates routinely swap them:

Worked example. A plan changes its plan year end, creating a short plan year from January 1, 2026 to June 30, 2026 (6 months).

• §401(a)(17) limit: $360,000 × 6/12 = $180,000.
• §415(c) dollar limit: $72,000 × 6/12 = $36,000.
• §414(q) HCE threshold: $160,000, unprorated. Compensation for HCE determination is measured over the lookback year, which is a full 12-month period, so no proration applies.

Former HCEs

A former HCE is a former employee who was an HCE either:

1. In the plan year in which they separated from service, or
2. In any determination year ending on or after the employee's 55th birthday.

Once a former HCE, always a former HCE — the status does not lapse.

Where former HCEs matter: they are included only in nondiscrimination tests that consider former employees, principally the §401(a)(4) benefits, rights and features testing and certain §401(a)(4) tests applied to former employees. They are not included in the ADP or ACP test, because those tests count only eligible employees for the year, and they are not included in coverage testing under §410(b), which counts current employees.

Former key employees, by contrast, are a top-heavy concept and are excluded from both the numerator and denominator of the top-heavy ratio — a different rule for a different test, and a frequent source of confusion between the two.

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Common ASPPA QKA Exam Traps

• Trap 1 — Making a first-year employee an HCE on compensation. Without lookback-year compensation, only the ownership test can apply.
• Trap 2 — Applying the calendar-year data election to the ownership test. It governs the compensation test only.
• Trap 3 — Prorating the $160,000 HCE threshold in a short plan year. It is never prorated; §401(a)(17) and the §415(c) dollar limit are.
• Trap 4 — Adding a compensation requirement to the ownership test. A more-than-5% owner is an HCE at any compensation level.
• Trap 5 — Confusing former HCEs with former key employees. Former HCEs affect certain §401(a)(4) testing; former key employees are removed entirely from the top-heavy ratio.
• Trap 6 — Using the determination year's threshold. Compensation is compared against the threshold in effect for the lookback year.