Plan Design Risk: Employee options can equal ownership

Employee options can elevate compliance risk.

Many new companies use stock options, grants, or warrants as a way of rewarding early employees. This can result in a larger number of employee-owners, who may be considered a Key or Highly Compensated Employee (HCE). If such Key employees’ and HCEs’ 401(k) contribution assets exceed 60% of plan assets, the plan will experience a Top Heavy testing failure. 

If your company has issued or will issue significant stock options to employees, you should review your outstanding stock options before beginning a 401(k) plan to determine who at that time and in the future will be considered a Key Employee. If this is a significant proportion of employees, you may wish to consider a Safe Harbor plan to counter the increased risk of Top Heavy failure. 


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