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Good morning to all, We have a takeover case in which we want to be sure we correctly identify the Key employees. We are not sure because we do not know anything about trusts. I know the following is convoluted but I am not making this stuff up! The company was started by two brothers, who we will call Bill and Sam. Bill is the president of the company, and Sam has passed away. The ownership of the shares of the company are as follows: 24.7% belongs to a Q-TIP trust for the wife of Sam who is not an employee. We aren't worried about this. 41.1% belongs to Bill. That's a no-brainer. He's an owner and President of the company. Key and HCE. Bill's 3 kids are on the payroll. One of them owns 0.8% of the stock outright. Another 15.9% of the stock is in a trust for Bill's 3 kids, who are treated equally under the trust. To our knowledge, the trust and the percentages are irrelevant here. The fact that the kids are on the payroll and their father owns 41.1% of the stock is sufficient to make all of them Keys and HCEs. Now comes the part we are not sure about. Sam, remember, is deceased. Sam's 4 kids are on the payroll too. One of Sam's kids owns 1.6% of the company outright. Then, as in the case of Bill's kids, 15.9% of the stock of the company is in a trust for these 4 kids and they share equally in it. So one son has his own 1.6% that he owns outright plus 3.98% that he indirectly owns through the trust for a total of 5.58% of the stock being for his benefit. His 3 siblings just have the 3.98% each that they own indirectly through the trust. Are Sam's kids Key and HCE or not? We don't know what impact the trust has on making this determination. Our suspicion is that maybe the son who has the total of 5.58% is a Key and maybe the siblings who only have 3.98% are not, because they have less than 5%? We'd much rather hear what the experts have to say than just go on our suspicions. None of these children, neither Bill's nor Sam's, has a sufficiently high salary to be considered an HCE just on that basis. None is an officer of the company with a sufficiently high salary to be considered a Key just on that basis. It's all about the stock. Your advice will be greatly appreciated.
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Today my skills as a magician are being questioned, as I have failed to pull a rabbit out of hat.... A referral partner has brought us a situation with a client of his who is not our client. The party in question has a 401(k) plan that eliminated its Safe Harbor match in 2012 and has been subject to all testing ever since. This employer is angry because he has been told that for the first time, his plan became Top Heavy for 2018 based on the 12/31/2017 results of the test. He has been told that if he doesn't want to be obligated to make a Top Heavy contribution of any kind, then the Key employees cannot defer in 2018. Deferrals count, and even if a Key only deferred 1% of pay, then the company would owe the non-Key participants 1% of pay as a TH minimum contribution. Of course if any Key deferred 3% or more, then the company would have to make the standard 3% TH minimum contribution. The referral partner is looking to us for some kind of magic trick to allow the Keys to defer whatever they want to defer and somehow not owe a TH minimum contribution. My crystal ball must be cloudy or something because there's nothing I can find to do about 2018. For 2019, they should adopt Safe Harbor provisions again, whether it's the 3% SHNE or the basic SH match. If they aren't willing to do that, then they just have to accept the fact that the Keys can't defer. Am I missing something? The referral partner has been told that a "creative solution" should be found. I can think of all kinds of creativity for failed ADP/ACP tests, cross-tested formulas that don't work out, etc., but I don't know of a "creative" solution to Top Heavy! Any ideas will be appreciated. Thanks!
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Good morning to all! We have a plan where there are two Key employees as identified by our software and they both surprise us in how they were handled. The first one was already HCE in 2016 but not Key, by virtue of his salary. He does not own any stock in the company. In 2017 he became the President of the company. The software identifies him as a Key employee in 2017 and we thought it would be 2018 before he would be considered a Key employee. The second employee was Key already but died in 2017 and his account balance was distributed before 12/31/2017. The software put his distribution in the account balance column as a negative number and subtracted it from the President's account balance to get a net difference for the Key employees' balances for the year. To be clear: President has let's say $200,000 which is considered a Key balance, to our surprise, and deceased person's distribution of his $10,000 account balance is picked up as a negative number in the test, so the net Key balances on the Top Heavy Test are $190,000. Does this seem normal to any of you? Thanks in advance for any advice.