In our annual year-end data collection process, we always ask our clients to confirm who their officers are. Sometimes our clients will ask us what it means to be an officer. This article is intended to provide guidance on this important question.
The Definition of Corporate Officer
The term officer means “an administrative executive who is in regular and continued service” as defined in Treas. Reg. §1.416-1, T-13. An employee’s status as an officer shall be determined upon all facts including “the source of his authority, the term for which elected or appointed, and the nature and extent of his duties.” Under this definition, an individual is not an officer simply because he or she holds a specific title or has completed a one-time transaction. To be considered an officer, the individual must have a certain authority and must be continually and regularly active in his or her role. In fact, an employee may be considered an officer for compliance testing purposes even if he or she does not hold a specific title if the relevant facts apply and the individual is an officer “in substance.”
What Does It Mean to be an Officer in Substance?
The Code bases the definition of an officer on facts and circumstances. Following this basis when considering which employees are officers, the focus should be on duties and responsibilities, not on titles. For example, an employee given the title of assistant secretary-treasurer merely to sign checks is not necessarily an officer (Revenue Ruling 80-314). This employee would need to have regular and continued responsibilities and a certain amount of authority to be considered an officer. As another example, a business that is not a corporation may still have officers under this facts and circumstances model.
Compliance Testing and Corporate Officers
Every year, your Blue Ridge administrator must determine which employees are considered key employees. An employee is considered a key employee if at least one of the following definitions apply during the preceding plan year: 1) the employee directly or indirectly owns more than 5% of the business, 2) the employee directly or indirectly owns more than 1% of the business and has annual compensation exceeding $150,000, or 3) the employee is an officer whose annual compensation exceeds $175,000 (amount subject to annual adjustment in the Code). Therefore, it is important to understand which individuals are officers when determining key employees.
Is There a Limit on the Number of Officers?
The number of individuals who can be considered key employees based on the officer test is limited to the greater of 3 employees or 10% of the number of total employees during that plan year (where no more than 50 employees can be considered key employees under the officer test). However, it is important to determine and report all officers of the company to Blue Ridge each year so that accurate testing can be performed.