Shareholder daughter allocation in cross tested formula

[Guest MEGary]

We have a takeover plan that has 2 owners (husband 51% and wife 49%), the daughter of the owners and a handful of other non-highly compensated employees. The cross tested allocation formula indicates 2 groups of classes - A & B. Class A is the non-shareholder employees and Class B is the shareholders of the company. My question is this: is the daughter considered a shareholder (Class b) for purposes of the allocation even though she doesn't directly own any of the stock of the company? I know for purposes of key employee and HCE, the stock is attributed to her, but what is the case for an allocation? She is the youngest employee with the company, so it will really make a big difference what Class she should be included in.

Thanks in advance for any feedback.

[rcline46]

You should be more specific in naming groups in the future. She is a shareholder and therefore is in group A. Create 3 groups - and specifically name the daughter in one group.

[Guest MEGary]

Thanks rcline46 for your input - since this was a takeover plan, we didn't complete the document and we completely agree with you about the original document being more specific.

[Earl]

My take is that you could do whichever you wanted if always consistent, but that you would be well advised to firm up the class definitions as soon as possible.

My favorite was a document I took over that said group 1 was "doctors" (not physicians). Well, guess what? The office manager had a PhD and wanted $30,000! She got it, too...

I have done your fact pattern with 2 groups, stating group 1 is only direct ownership without regard to attribution rules (assuming you don't want to favor the daughter).

It might also be to your advantage to have the kid in a separate, third, group and give her an allocation lower than the NHCEs, if she is young. Could do wonderful things for Mom and Dad's allocation testing.

I also took over a plan that had a group titled "children of owner". As I recall that was a direct quote and the plan had a DL. I thought that was kind of vague.

[Lynn Campbell]

I have a client with husband and wife as the only HCEs - they have 2 young - ages 22 and 25 - children who are HCEs by attribution - both are eligible to be in the Plan, but they do not help the average benefits test. These 2 young HCES cause the NHCES to get a much higher contribution....If I exclude one of the children, how will that affect the test? Can I then show less than 100% of HCE's benefitting? Or if one family member benefits is the % of HCEs benefitting considered to be 100%?

[Mike Preston]

Hi, Lynn.

Whether by attribution or not, you have 4 HCE's in your plan. If one of them doesn't get a benefit, you have 3 out of 4 benefitting and all of your percentages go down accordingly.