ADP testing when owners hire their minor sons part time and eligibility for deferral is immediate with no age or service requirements

[Guest DIGMYDOG]

I'm just curious...

Two (more than 5%) owners hire their minor sons (one is only 17 years old), have a plan that has immediate entry (no age or service requirements) for deferrals and are able to defer the max because of the fact that their sons do not defer at all so the ADP is lower for the HCE group.

Because of attribution rules, the sons are considered owning the same percentage as their fathers, so they are also in the HCE. The thing is, they are really part timers and, of course they are not deferring. This is making it possible for their fathers to defer the max.

Does this seem right? Am I missing something...or am I being too cautious.

Any imput?

[Mike Preston]

You need to ask yourself the following questions:

Are they legitimately employees of the company?

Are they treated the same way any part-timers would be treated?

If yes and yes, then you are forced into including them in the ADP test. If they happen to have zero deferral percentages, so be it.

Be sure that you run the right test, though. That is, current year or prior year.

[Guest DIGMYDOG]

Yes, they are treated the same as other part-timers.

Well, we are using current year testing.

I am wondering though, wouldn't they still be considered in the HCE if using prior year? They are considered more than 5% owners so they would be in HCE whether we use current or prior year testing because you would be looking at determination year and look back year, right? They were not employed in 2002. They were hired in 2003.

Please tell me why current or prior is issue. Am I missing something?

Thanks for your help.

[Mike Preston]

I wasn't talking about the HCE determination, which is always based on the prior year's compensation, except, as you noted, for those considered to be 5% owners. Instead, I was just pointing out that if they joined in 2003 and were HCE's in 2003 you would look to the ADP for NHCE's in the prior year if the plan is basing its ADP test on prior year. You have it right, so forget what I said about prior year stuff.