Classification of Owners and their children

[KateSmithPA]

In perusing another topic on this board, Tom Poje mentioned in passing that if one classification in a cross-tested plan is "Owners" then the children of the owners are in. We have a plan, drafted by a law firm, that has "Owners" as one class and "Children of Owners" as another group. Is this a problem? That is, are the children already included in the first group? And, if they are, how do you keep them out of that group?

[TBob]

I have seen documents written with the classifications of "Direct Owners / Owners by Attribution" in order to avoid this problem.

[AndyH]

Tom's busy singing God Bless America and is not practicing medicine. (Sorry Kate, I could not resist just once-now I feel better)

No, I think Tom was simply highlighting the ambiguity. The clearer the better. Owners vs Children of Owners are fine unless the children don't directly own stock then where are you? That's why TBob's design wins the prize IMHO.

[Earl]

Until a child is given 5%.

Direct Owners of more than 50% of the corporate stock

Direct Owners of 50% or less than 50% of the corporate stock

Spouse of direct owners

Children of Direct owners

I try to make that pretty standard wrt keys/HCEs (tweaking the % when appropriate)

[Tom Poje]

interesting.

so Mr Big owns 85%

Son #1 owns 15%

daughter #1 owns 0%

Mr Big is a male chauvinist

so son #1 would actually fall into two categories

[Belgarath]

I'm a little confused here. Going back to Tbob's classification - if the goal is to keep the children and the parents in separate groups, then a classification of "direct owners/owners by attribution" doesn't do it IMHO. When you use the virgule, you are separating alternatives. So I would read this classification to mean EITHER direct owners OR owners by attribution.

I haven't seen a magic definition that works in all cases - depends upon specific employee or family census, and plan goals. I tend to favor designations that specify key or highly compensated with percentages along the lines of what Earl was mentioning. But they have to be tweaked all the time for specific situations.

[TBob]

Belgarath - I am not sure if it was my haphazard inclusion of punctuation that confused you or if it was actually the classifications themselves. Sorry for the confusion. What I meant to say was...

Classification #1 = Direct Owners

Classification #2 = Owners by attribution.

Classification #3 = Any Others.

The point is that grouping "owners" together can cause you to include children or spouses where you did not intend. The solution, however you want to word it, is to be more specific in your definition. I like what Earl posted which is much more specific than my method.

Either way, I agree with you that there is no magical solution. You have to look at each clients structure and the goals they have for their plan and set up the classifications to meet those goals.

The fun part comes when your client (the owner) gives his son 5% of the company stock as a wedding present and messes up all your hard work!

[Belgarath]

Thanks - yes, it was the punctuation that was messing me up. And yes, the constant changes in ownership where the qualified plan is treated as an afterthought create some really challenging situations. Especially when they don't tell you for two or three years after it took place...

[Guest Dash02]

In the case of a C corp. sponsor, I refrain from defining an allocation group based on stock ownership. I've always been concerned that any allocations made to the owner/shareholder group would be suseptable to an argument that the allocation was made "with respect to the shares owned," which under general tax principals equals a dividend. Then, again, I'm nuts.

Instead, I usually define the allocation groups based on corporate office held as of the end of the plan year.

[Mike Preston]

Who's to say you aren't paranoid? They are, after all, after you.