inclusion of owner's 12 year old son

[dmb]

I am designing a cross-tested profit sharing plan for an owner and 7 employees. The owner's son who is 12 years old is a part-time employee. He has never worked 1000 hours. Would it be legal and/or ethical to allow anyone employed on 1/1/2001 to enter plan and class exclude owner's children??? This way the son won't benefit, but will still be included for testing. Thanks.

[stephen]

Yes it is legal. Would you even need to class exclude the son? Would he be eligble for a contribution working less than 1,000 hours?

It may make sense to adopt a integrated Profit Sharing plan with 401(k) feature (which you may want to set up as a safe harbor plan). Without having more information it's hard to say. There is a nice article in the most recent Journal of Pension Benefits (I think it was written by Larry Starr) regarding this type of set-up.

As for is it ethical - well that's up to the individual to decide. I've had clients change their profiit sharing formula to a cross tested formula where the owner was getting 60-70% of the total annual contribution to the plan and the staff was getting less than 3% contribution (the plans were not top heavy). I'm glad to see the new cross tested regulations stop these skewed allocations.

[Belgarath]

I agree, perfectly legal to exclude. Depends upon the document, of course, but since most documents provide that you receive no allocation if <1000 hours, you should be able to waive age and service without a class exclusion, and your testing will benefit by having him considered, and he'll receive no allocation.

If he's going to work > 1000 hours in future years, you may want to consider the class exclusion if they don't want him to receive an allocation. Just make sure it is a bona fide job classification, and not based upon age, service, etc...

[Blinky the 3-eyed Fish]

Quote from Stephen:

"I'm glad to see the new cross tested regulations stop these skewed allocations."

Quote from me:

"I'm not!" I'd rather the career I am in be more lucrative because law changes make it more attractive for potential businesses to implement a qualified plan."

Quote from Joe employee:

"I'd rather get a skewed allocation than no allocation at all!"

[Tom Poje]

problem not mentioned.

cross tested plan, most likely top heavy.

be careful - I guess you could write it so keys do not receive top heavy minimum, but if you dont, you might be shooting yourself in the foot.

[Guest sdolce]

To Stephen-Blinky makes a valid point.The typical small business owner usually chooses to implement a retirement plan , only if it's cost effective to do so.If he doesn't make a plan contribution he'll probably take the money as cash compensation, in which case he'll net about 60% after taxes.So the plan you're referring to would seem to be at best marginally effective if it's supposed to be a tax sheltering device. Your client sounds like a philanthropist,relatively speaking. One question:If his employee cost is now less than 3% of pay and he's only getting 60% of the pie,what's going to happen when he has to meet a 5% threshhold next year? Will the plan survive?If not ,where does that leave his employees?

[stephen]

To sdolce and Blinky,

The plans I mentioned are with my prior employer. I would expect the owners involved to increase the staff contribution to 5% and continue maxing themselves at $35,000 (soon to be $40,000).

The owners will still be getting better than 50% of the total contribution. They did not purely use the plan as a tax sheltering device they also viewed it as a way to attract and retain employees.

To Tom,

The plans I mentioned were allocated pro rata based on comp for many years and therefore were not top heavy when I administered them. Therefore, there was not a requirment for the 3% minimum contibution.

I'd be interested to hear your opinion on the new 5% contribution.

[Tom Poje]

I am comfortable with the 5% minimum. I have tested enough plans to know that to achieve the 30,000 contribution for the owner, that the minimum contribution was often above 3% anyway. With the new limit at 40,000 (despite the comp limit at 200,000), it would be darn near impossible in many cases for the plan to pass testing anyway without a larger contribution. If the owner is a lot older and wouldn't have problems passing testing he should be in a DB plan anyway.

Also note how the minimums (5%) and now 7 1/2% for combo DB/DC plans ties in with top heavy logic minimums. so, I have no problem.