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Can a parent make a deferral election for their child?


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Assume that a plan participant is a minor with legitimate plan compensation.  The minor’s parent makes the decision for the minor to make an elective deferral contribution to the plan without the minor’s consent (or even their awareness).  Would this create an operational failure where the plan document requires the election be made by the participant and doesn’t provide for proxy?  Or, would parental rights control here and allow for the parent to make this decision for their child?  If the parent has the ability to cause the contribution, would the child have the ability to override the election their parent made?

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I would think whoever has authority over the minor's estate ("guardian of the estate") could, and would have to, make such decisions on behalf of the child.  State law would tell you whether a parent (without further authorization from a court) acts in that capacity....

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My practical answer: the minor had to sign a whole bunch of forms to get employed; I guarantee they were not signed by the parent.  In my plans, I would want the eligible employee's signature on the deferral form.  That is an enforceable right under the plan and under ERISA law and I'm not sure the plan has to even be concerned about the fact that the employee is a minor. 

If the employee does not agree to the deferral, I would instruct our clients not to do it. 

If only the parent consents to it, I would instruct our clients not to do it.

If only the employee minor consents to it, I would instruct our client to honor that deferral election. 

And to complete the loop, if neither of them consents, well then........ ?

 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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In some states, minors need "working papers" that a bunch of other people have to sign (parents, school, doctor).  So if the kid is in this situation, I think the parent COULD make the decision.

 

but IANAL

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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46 minutes ago, BG5150 said:

In some states, minors need "working papers" that a bunch of other people have to sign (parents, school, doctor).  So if the kid is in this situation, I think the parent COULD make the decision.

 

but IANAL

Once the working papers are issued, then as long as the employer complies with the rules that apply (limited total hours, limits on school day hours, limits on certain types of duties, etc) the employer no longer needs any approval of the minor's parents.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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Allow me to add some context...Business owner employs his own child to perform certain minor services for the business.  Think cleaning, filing, updating social media accounts, etc...  They also may pay for modeling services posing for the company Christmas card or a highway billboard.  I'm confident that the minor did not sign any of the normal working papers that would be required of a "normal" employee.  If the working papers were required, but not attained before the child provided services, would that negate their status as an employee for plan purposes? 

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My only question for the lawyers that so far I have not see addressed is this:

Is making a deferral election in any way a contract to have money taken from a check or some other way ?

As a general rule minors can't sign contracts. 

So if a deferral election in any way forms a contractual relationship I would think a parent needs to be involved. 

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4 hours ago, MSN said:

Allow me to add some context...Business owner employs his own child to perform certain minor services for the business.  Think cleaning, filing, updating social media accounts, etc...  They also may pay for modeling services posing for the company Christmas card or a highway billboard.  I'm confident that the minor did not sign any of the normal working papers that would be required of a "normal" employee.  If the working papers were required, but not attained before the child provided services, would that negate their status as an employee for plan purposes? 

No. There are special rules for children of the owners in most states working for their parents. It can get complicated and may be dependent (or may not be) upon the form of the business and who owns it.  But in any case, if they are employed, they are employed for plan purposes, whether they have the appropriate working papers or not.  If they meet the eligibility requirements, they are in.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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17 hours ago, Larry Starr said:

That is an enforceable right under the plan and under ERISA law and I'm not sure the plan has to even be concerned about the fact that the employee is a minor. 

 

I couldn't disagree more with that statement.  In general a minor is LEGALLY incapable of entering into a contract of any sort, and one who does enter into a contract with a minor does so at their own peril.  The "classic" case is a car dealer who sells a minor a car, who then proceeds to total the car - and then the minor repudiates the contract due to minor "incapacity."  The car dealer (absent other issues) would have to give the kid their money back.  PERIOD.  A case like that is in every law school "Contracts" book.

I think a plan sponsor should be very very concerned with a minor making an election.  The minor could repudiate that - requiring the empoyer to give the kid their money back - BUT MAY NOT NECESSARILY HAVE AN ERISA "REASON" FOR TAKING THE MONEY OUT OF THE PLAN.  Get an attorney - check out state law on minor capacity, and be very very cautious.

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9 hours ago, MoJo said:

I couldn't disagree more with that statement.  In general a minor is LEGALLY incapable of entering into a contract of any sort, and one who does enter into a contract with a minor does so at their own peril.  The "classic" case is a car dealer who sells a minor a car, who then proceeds to total the car - and then the minor repudiates the contract due to minor "incapacity."  The car dealer (absent other issues) would have to give the kid their money back.  PERIOD.  A case like that is in every law school "Contracts" book.

I think a plan sponsor should be very very concerned with a minor making an election.  The minor could repudiate that - requiring the empoyer to give the kid their money back - BUT MAY NOT NECESSARILY HAVE AN ERISA "REASON" FOR TAKING THE MONEY OUT OF THE PLAN.  Get an attorney - check out state law on minor capacity, and be very very cautious.

We will have to disagree.  You cannot compare the car case to a minor legally working (with the appropriate government blessing).  That is a big difference.  The very fact that they are selling their services for compensation is a contract in itself.  The employee (minor or not) who is eligible for a 401(k) (very rare in itself for a minor) can do all the things appropriate as an employee (s/he has been given permission) and that includes signing up for the 401(k).  The minor will not be able to repudiate it on the basis that they are under age to make a binding contract; that right was given to them when they received their working papers.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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On 9/13/2019 at 5:18 PM, Larry Starr said:

We will have to disagree.  You cannot compare the car case to a minor legally working (with the appropriate government blessing).  That is a big difference.  The very fact that they are selling their services for compensation is a contract in itself.  The employee (minor or not) who is eligible for a 401(k) (very rare in itself for a minor) can do all the things appropriate as an employee (s/he has been given permission) and that includes signing up for the 401(k).  The minor will not be able to repudiate it on the basis that they are under age to make a binding contract; that right was given to them when they received their working papers.

If you want to take the risk.  Go for it.  I'll always require a "legal" guardian to make the election.  Interestingly enough, yes, UNDER CERTAIN CONDITIONS a minor can enter into an employment contract - but the difference is, they only get paid for performance.  If the minor repudiates the contract - their is nothing to do to remedy the situation (as the labor can't be given back).  Big difference....  And by the way, many states have "specialty" law concerning children in the workforce.  The most significant example is CA - with respect to child performers.  My advice stands - get an attorney.....

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9 hours ago, MoJo said:

If you want to take the risk.  Go for it.  I'll always require a "legal" guardian to make the election.  Interestingly enough, yes, UNDER CERTAIN CONDITIONS a minor can enter into an employment contract - but the difference is, they only get paid for performance.  If the minor repudiates the contract - their is nothing to do to remedy the situation (as the labor can't be given back).  Big difference....  And by the way, many states have "specialty" law concerning children in the workforce.  The most significant example is CA - with respect to child performers.  My advice stands - get an attorney.....

I should just point out that if you are REQUIRING a legal guardian and one is not legally required, you are interfering with participant rights and that is a major Bozo No No!  Sure, get an attorney to research the issue for your state, but if he says no guardian required, you should drop that requirement.  FWIW.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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3 minutes ago, Larry Starr said:

I should just point out that if you are REQUIRING a legal guardian and one is not legally required, you are interfering with participant rights and that is a major Bozo No No!  Sure, get an attorney to research the issue for your state, but if he says no guardian required, you should drop that requirement.  FWIW.

Uh huh.  Well this "Bozo" is an attorney, and has done the research.  No guardian signature, no deferral.  Rarely happens, though.  Virtually all plans we are involved with have at least an age 18 criteria - if not 21.  If someone wants to do it - it's because "Junior" has a cushy job (marketing - attaching the kids to the promos), and if they are making enough to actually make it worth while deferring, would have vetted it first....

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1 minute ago, MoJo said:

Uh huh.  Well this "Bozo" is an attorney, and has done the research.  No guardian signature, no deferral.  Rarely happens, though.  Virtually all plans we are involved with have at least an age 18 criteria - if not 21.  If someone wants to do it - it's because "Junior" has a cushy job (marketing - attaching the kids to the promos), and if they are making enough to actually make it worth while deferring, would have vetted it first....

Wonderful; can you share the research? Do you have a ruling from the State Department of Labor?  What info brought you to that determination?  BTW, we have NO plans under age 18 (I'm not sure we have any under 21 at this point), so this is not an issue we have to deal with in our plans.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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20 minutes ago, Larry Starr said:

... a major Bozo No No! 

Warning.  Technical terms in use.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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11 minutes ago, Larry Starr said:

Wonderful; can you share the research? Do you have a ruling from the State Department of Labor?  What info brought you to that determination?  BTW, we have NO plans under age 18 (I'm not sure we have any under 21 at this point), so this is not an issue we have to deal with in our plans.

No.  My research was specific to the jurisdiction in which I'm licensed to practice - and was paid for by a client.  I don't need a "ruling" from the State Department of Labor.  It's actually a Probate Court matter - which is where capacity of a minor, and the roles/responsibilities of guardians are assigned/determined.  Keep in mind that ERISA only preempts that which is inconsistent with it.  The incapacity of a minor to entering into legally binding relationships is not inconsistent with ERISA.  Maybe parallel to part so fit, but not inconsistent.

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36 minutes ago, david rigby said:

Warning.  Technical terms in use.

If you don't know that technical term, see this link: https://www.snopes.com/fact-check/cram-it-clown/

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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                     Let me add my support to M, who is describing the common situation in which a parent pays a minor child to be an employee of the parent’s business. The unusual fact is that the business has a 401(k)-plan permitting deferral and contribution to the plan of part of the child’s compensation.  The question is who can make such deferral decision, including what portion of compensation to defer.  No State law permits minor children to decide how to dispose of their property. All states have a procedure by which the state courts or a guardian appointed by the court may exercise such power. ERISA has no provision that gives minors or any other individual lacking the capacity the ability to decide how to dispose of such individual’s property. Thus, the plan could not rely on any election executed by the minor or any other individual without capacity

                     Thus, an ERISA plan must defer to the decision of the child’s guardian or a local court about the extent of the child’s deferral, the investment of the deferrals, or the form of the distributions of the child’s account balance on the termination of employment.  Parents need not be their minor child’s guardian, but in practice if there is no marital dispute or parental abuse issue, a child’s parent is often accepted as the child’s guardian without any court appointment. 

          If an ERISA plan withholds compensation in a manner that is not consistent with the election of the child’s guardian, the consequence would be the same as if it withheld compensation of any employee with capacity without the employee’s consent. In either case, the employee would be entitled to a refund of the wrongful contribution and accrued earnings.  If the 401(k) plan had a qualified automatic contribution arrangement the issue would remain because such arrangements must give the employee the right to stop such contributions. This right would be a nullity unless the person with the right to act on behalf of the employee without capacity is timely given such a right.  Whether or not the guardian of the individual without capacity seeks a refund in such a case has nothing to do with the tax qualification of the 401(k) plan.  If the plan fails to follows its terms that deferrals be made only in accord with employee elections, whether initial or to stop an automatic contribution, the plan is not tax-qualified. There would no such compliance if an employee lacks capacity to make such an election, and the person, if any, with such authority is not given the right to make such election.  On the other hand, a timely refund could eliminate the tax-qualification issue.

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9 hours ago, Albert F said:

                     Let me add my support to M, who is describing the common situation in which a parent pays a minor child to be an employee of the parent’s business. The unusual fact is that the business has a 401(k)-plan permitting deferral and contribution to the plan of part of the child’s compensation.  The question is who can make such deferral decision, including what portion of compensation to defer.  No State law permits minor children to decide how to dispose of their property. All states have a procedure by which the state courts or a guardian appointed by the court may exercise such power. ERISA has no provision that gives minors or any other individual lacking the capacity the ability to decide how to dispose of such individual’s property. Thus, the plan could not rely on any election executed by the minor or any other individual without capacity

                     Thus, an ERISA plan must defer to the decision of the child’s guardian or a local court about the extent of the child’s deferral, the investment of the deferrals, or the form of the distributions of the child’s account balance on the termination of employment.  Parents need not be their minor child’s guardian, but in practice if there is no marital dispute or parental abuse issue, a child’s parent is often accepted as the child’s guardian without any court appointment. 

          If an ERISA plan withholds compensation in a manner that is not consistent with the election of the child’s guardian, the consequence would be the same as if it withheld compensation of any employee with capacity without the employee’s consent. In either case, the employee would be entitled to a refund of the wrongful contribution and accrued earnings.  If the 401(k) plan had a qualified automatic contribution arrangement the issue would remain because such arrangements must give the employee the right to stop such contributions. This right would be a nullity unless the person with the right to act on behalf of the employee without capacity is timely given such a right.  Whether or not the guardian of the individual without capacity seeks a refund in such a case has nothing to do with the tax qualification of the 401(k) plan.  If the plan fails to follows its terms that deferrals be made only in accord with employee elections, whether initial or to stop an automatic contribution, the plan is not tax-qualified. There would no such compliance if an employee lacks capacity to make such an election, and the person, if any, with such authority is not given the right to make such election.  On the other hand, a timely refund could eliminate the tax-qualification issue.

Again, we'll agree to disagree (or at least, I will).  You ignore the fact that we are dealing with an employee allowed to be employed by the issuance of child working papers, which had to be approved by guardian, school and who knows who else in a given state.  The permission for that child to be an employee has already been given; it is not restricted with regard to the application of benefits from that employer AGAIN by the guardian. I would want to see a federal court of competent jurisdiction opine that a bona fide employee loses his ERISA rights when he is a minor.  Frankly, a probate court decision is not enough because this is not to be determined under state law, but rather whether ERISA controls, and that is made only at the fed level. FWIW.  

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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9 minutes ago, Larry Starr said:

Again, we'll agree to disagree (or at least, I will).  You ignore the fact that we are dealing with an employee allowed to be employed by the issuance of child working papers, which had to be approved by guardian, school and who knows who else in a given state.  The permission for that child to be an employee has already been given; it is not restricted with regard to the application of benefits from that employer AGAIN by the guardian. I would want to see a federal court of competent jurisdiction opine that a bona fide employee loses his ERISA rights when he is a minor.  Frankly, a probate court decision is not enough because this is not to be determined under state law, but rather whether ERISA controls, and that is made only at the fed level. FWIW.  

Permission to be an "employee" doesn't equate to permission to make decisions about participation in a benefit plan.  There is a difference.  "Working papers" set conditions for the type of labor, hours,etc - but nothing beyond the four corners of the authorization.  It isn't "open ended."  ERISA has nothing to do with it.  ERISA only preempts when inconsistent with state law.  Nothing inconsistent here.

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Let me try again. The question at issue is not the child’s ERISA plan rights, but who can exercise those rights.  

If the child/employee is an 18-month-year old model, the child would have a right to the agreed compensation, but could not sign any papers to bring a legal action to recover any unpaid compensation.  The guardian of the child could, however, execute such papers and bring such an action, recover the funds and deposit the funds in an account for the benefit of the child. 

Similarly, the 18-month old could not understand or execute any compensation deferral elections, any investment directions, or make any distribution decisions with respect to a 401(k) plan for which the child is an eligible participant.  However, again the child’s guardian could act on the child’s behalf to enforce the child’s ERISA plan rights. 

Moreover, if the plan acted contrary to common sense and treated the 18-month child/employee as willing and able to elect whether to make a deferral, choose plan investments, or plan distributions, the plan would almost certainly be violating the plan terms and the tax-qualification rules.  

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