key employee due to attribution

[MJ Hartman]

looking at a plan where the owner died in 1998. Daughter becomes eligible to participate in the plan in 1999. She had no actual ownership since her date of participation but was included as hce due to attribution. She will acquire no ownership of the company until 2005. The current administrator is showing her to be in the hce group which I know is not valid based upon her current ownership (0) and her wages are not in the hce classification range.

the adp test is using her to pass the tests because she isn't deferring. moving her into the nhce group will fail the test in the first year she is being considered a former key employee.

My question is when did she become a former key employee? 2001?

If this plan has been using prior year testing what year did she fall into the nhce group, 2001 or 2002?

The plan has not been updated for gust or egttra yet either.

[Guest RBeck]

who owns the company now? Owner's widow/er? In that case, attribution would still apply, IMHO.

[MJ Hartman]

the company is currently owned by the deceased sister. she is currently deferring and is the only owner since his death in 1998

[Guest jashendo]

Since there is no attribution between aunts/nieces, and since you say her wages are not in the HCE range, why is the daughter a HCE at any time after 1999?

You also ask about "key employee" status. If her compensation was enough to put her in the old "top ten" group, since she constructively owned one of the ten largest interests in the company in 1998, she would have been a key employee thru 2001 (until the definition changed under EGTRRA, effective 1/1/2002 -- calendar year plan, right?). But being a "key employee" is not the same as being a "highly compensated employee."

[E as in ERISA]

Are you sure that you have the correct info regarding the ownership? Your facts suggest that the deceased left all of the stock to his sister for a term of 7 years, and that at the end of that period all or part of that stock will then go to his daughter. That would be a unusual form of transfer. It would be more likely that the daughter's share would be placed in a trust that she couldn't touch for that period of 7 years (until she reaches a certain age). The aunt might even be the trustee. And the aunt might be voting all the shares, controlling the company until the daughter reaches a specific age. So every considers her to be the sole owner. But if a trust is involved, then under the rules of 1563 the daughter would probably be considered as owning the stock.

[MJ Hartman]

thanks for all of your responses. I just need to determine the year that this girl was no longer considered an owner(key employee) for 401k testing purposes. based on the effective date under EGTRRA she was a former key employee effective with the 2002 calendar plan year, correct?

You are correct Katherine, when she attains age 25 she will start to acquire percentages of ownership incrementally. Her aunt is controlling the trust that was set up for her and her brother, who is not an employee of the company at this time.

[Guest jashendo]

MJHartmann --

Forgive me if I seem confused, but you seem to be using 3 different concepts interchangably. Is your question whether daughter is (1) an owner, (2) a "key employee", or (3) a "highly compensated employee" ?

Although there is some overlap, these are 3 different concepts, relevant for at least 3 different purposes.

For example, if your concern is "401(k) testing" (by which I assume you mean ADP/ACP testing), then what you need to know is whether she is a HCE; it is not relevant whether she is an owner or a key employee, except insofar as ownership of the company is a factor in determining whether she is a HCE. If you are concerned with top-heavy testing, then you need to know whether she is a "key employee" (or a former key employee). An active employee who is currently a key employee will always be a HCE, but a former key employee may or may not be a HCE.

In my earlier post, I stated that the EGTRRA change to the definition of "key employee" would have rendered her a former key employee in 2002 (assuming a calendar year plan), but that was based upon the belief that she had no ownership interest in the company (that her aunt owned 100%) since the 1998 death of her father. Now that appears not to be the case. If the stock is held by a trust, of which the daughter is a beneficiary, the trust's ownership of the company is attributed to her based upon her actuarial interest in the trust. So long as that interest is at least 5% (assuming that the trust owns 100% of the equity in the company), she would have continued to be a "5% owner"of the company each year since 1998, and she continues to be a 5% owner. She would then be both (1) a "key employee" (not a former key employee) for top-heavy purposes, and (2) a "highly compensated employee" for ADP/ACP purposes, regardless of whether the plan uses current- or prior-year testing.

[MJ Hartman]

let me explain. The aunt is currently 100% owner of the company. Once this daughter reaches 25, ownership will start to transfer to her behalf. The trust that exists for the children is for assets held outside of the company (life insurance proceeds?). The aunt is the trustee/guardian of these assets.

Sorry for the confusion. The daughter has no account balance in the plan, she does not defer. There are no top heavy issues to worry about. The aunt has a small balance in the plan which is nowhere near 60% of the plan assets.

[Guest jashendo]

Okay, MJH. Then I'll go back to my original response.

If aunt is actually the owner of 100% of the stock (since 1998), then, since there is no attribution between aunts and nieces, the daughter would not have been a 5% owner since 1999 (there's a one-year lookback). If, as you said, her comp is below the HCE threshholds, since she is not a 5% owner she would not be a HCE (nor would she have been a HCE in 2000, 2001, or 2002).

If you are not concerned with top-heavy issues, then you are not concerned with whether she is a key employee (she would not be one now; she may have been in the past, depending on additional facts, but irrelevant except for top heavy purposes).

I suggest you check into the ADP status for years 2000, 2001 and 2002 (and current year?). Your original post indicated that the plan would not have passed if daughter was NHCE. If the facts are as you have stated, that seems to be the case.