ADP test and HCE w/ $0 comp

[dmb]

The son of the 100% owner works at the company full time, but does not receive any compensation. Should he be incuded in the ADP test or any other non-discrimination testing??? Thanks.

[Tom Poje]

the IRS has expressed an opinion at least at a couple of ASPA conferences(opinion only for there is nothing in the regs) that it is more reasonable to not include the ee in any testing. Basically, he has no comp, therefore he could not defer. Assuming he wouldn't defer give him some comp and solve your problem

[austin3515]

Why not take the opposite position since there are no regs - include him as an ADP of zero, thereby helping the testing results?

[Tom Poje]

your joking, aren't you? I understand what you are saying, but

Since when would the IRS approve a method that heavily favors the HCEs.

I think that's why they suggest ignore the ee entirely.

[austin3515]

I just thought if its unclear and defensible (because not specifically excluded), then go for it...

But in retrosect I agree with you - they would surely be all over this..

[Guest Robin Vatalaro]

Apologies for continuing a seemingly dead thread..........

I had a situation last year (and may this year also; am waiting for CPA to release K-1's to me) where LLC owners had negative earnings from SE so technically had no comp and therefore could not defer. I posed the same question on the Boards - include or exclude from the test. Many people responded that there was no authority for excluding them, yet it is not possible to divide by zero, so there is no mathematical way to test a participant w/ zero comp - right? Why can't the IRS just clarify this? No response necessary, just some added thoughts on an interesting subject.

[Tom Poje]

Again, this was the very issue discussed at the ASPA conference in Fall 2000 - the exact same scenario, an ee with negative comp:

in fact, ee deferred during the year

Person treated them as follows

ee over 415, $ must be refunded

410(B) - no treated as benefiting as they received no contribution

401(a)(4) treated as zero in rate group testing

adp - treated as 0%

IRS response, yes to the first two, not eligible (or ignore) for the next two

of course, as always, Q and As are only opinions and do not necessarily reflect any official position.

personally, I might argue with the 410(B) point, because I thought the regs said you could treat someone who failed to receive a contribution due to 415 as benefiting

[AndyH]

Not that Tom needs backup, but Jim Holland was adamant. No comp means not in the test. Not a $0. Not a 0%. Not in any test.

[Tom Poje]

Ah, Andy remembers the discussion better than I do. I only have a chicken scrawled note on my Q and A's!

You da man!

[E as in ERISA]

The IRS will issue new proposed 401(k) regulations soon -- consolidating a lot of guidance out there. If these types of things aren't in those regulations and you want the guidance, it might be a good idea to submit comments!

[Gilmore]

On the flip side...

What if a previously eligible non-highly compensated employee is not formally terminated but does not receive compensation for the year. Is the conservative thing to do to include that employee in the test, or is that too conservative?

Would it make a difference if the employee was still receiving other benefits, like medical coverage?

Thanks.

[david rigby]

How would a person with $0 comp be eligible to defer?

[Gilmore]

Hi Pax,

I just wasn't sure if the 'no comp' thing was always discussed with respect to HCEs, and if an NHC with no comp was treated differently.

Can you be eligible to defer, that is met the plan's eligibility requirements, but not able to defer because of no comp?

[Mike Preston]

My understanding is that the IRS believes the "no comp" rule applies to NHCE's as well as HCE's.

[Gilmore]

Great, thanks Mike.