Excluding One Child Out of a Family of Owners

[Guest Jimmy B]

Situation:

Cross-tested profit sharing plan of a company owned by two brothers. Both brothers have their children (in their 20's) working for the company. The two owners are in the top rate group receiving $40,000 each and the rest of the employees receive the gateway minimum (5%). In the past, plan had no problems with testing. However, one of the sons is now turning 22 this year and will be newly eligible in the plan, wrecking all the testing since he would be in a rate group all by himself (even at 5%). Is there a way to exclude him by himself and still allow the other HCE children to participate? Can you exclude all HCE's under age 25 for instance? Or should a new group be formed for all HCE's under age 25 and then contribute 0% for them? Plan passes without him but not with him. Any other options?

Thanks...

[Guest jgordon]

I usually have a group for the owners (I usually name them as Targets and then define Targets with the names of the owners) and the a group for all other non-key participants (defining non-key in my top heavy definition section). That seems to keep the children from receiving an allocation and then you have HCE participants with a 0 allocation which helps testing.

[AndyH]

I don't understand the last response, but here's mine:

Your client might be best served by keeping the child in an allocation group with NHCEs and then breaking the plan into to component plans. Test one component on a benefits basis and the other, which includes the HCE child, on a contributions basis. To do this, each component must separately satisfy the ratio/percentage coverage test. The HCE-child will have the same allocation percent (e.g. 5%) as the others in his component, so there will only be 1 rate group in that component with lots of NHCEs.

If you do a search for component plan testing in this section, there are a number of detailed explanations.

Your second option is to put the HCE children in their own allocation group, defined as perhaps owners through attribution. And give them a low enough allocation to allow it to pass. But you should do this only if you are unable to do the first.

Your eligibility exclusion idea could perhaps be done but it has some potential problems, so I would advise against it.

[Mike Preston]

Yeah....what Andy said!

[Guest Jimmy B]

I am not very familiar with testing using component plans and I'm not sure if the client will want to pay for me to learn. Therefore, is it possible to amend the plan to have three groups: Officers (only the two owners), Highly Compensated Employees under age 25, and All Other Employees? This will allow the owners to get $40,000 each, their kids over age 25 to get 5%, and pass all the testing. I'm just not sure if it's legal to use a group that's based on age, even if it applies to HCE's only.

[AndyH]

possible: Yes

legal: Maybe. maybe not.

wise: Some would say no problem. I would advocate against any explicit use of age in an allocation formula that creates the possibility of someone older receiving less than someone younger based solely on age, even if a specific current census makes that unlikely.

[Mike Preston]

I don't think that HCE's are unprotected as far as ADEA goes, so Andy's comments are right on. However, I believe the key employees due to stock attribution may not be protected, so what about a class that is defined like that?

[Blinky the 3-eyed Fish]

From the discussion I am not able to determine for what period this testing is being done. So I thought I would just throw out, as a reminder to Jimmy, that you cannot take away the right to a contribution that is already earned. So hopefully we are not talking about a 2002 year-end.

[MR]

We have typically created a group specifically for the youngest offspring, but we also make sure the top heavy section of the plan applies only to non-key employees. this permits an allocation of zippo to the little fly in the ointment. sometimes even a 3%thm is sufficient to mess things up.

[AndyH]

Yes, but that "little fly" may some day be your client. Then he'll ask why he got less than he could have, and less than the regular employees.

[Mike Preston]

I have found that this is rarely a problem. Tell him or her that they were sacrificed at the altar of providing bigger benefits to the then more favored group. If they are, at that time, part of the more favored group they will appreciate the skill brought to bear on the issue currently.

[AndyH]

I don't disagree . My comment was intended to be "tongue in cheek", if that is the right phrase.