Excluding Son of HCE vs. 0% allocation

[Guest chris4013]

Our company excludes the son in our documents to remove the negative impact of a young hce receiving an allocation in 401a4 testing.

I believe we should make children their own rate group and give them a 0% allocation to help our testing further with a 0% allocating to an HCE under 401a4.

My colleague believes the IRS would not approve of my strategy. What are your thoughts?

Thank you

[AndyH]

Oops. I deleted Tom's reply by accident. Sorry.

[Guest chris4013]

Oops. I deleted Tom's reply by accident. Sorry.

Can you put his reply back up?

[Tom Poje]

basically it goes something like this:

whether you exclude the son from the plan, or put him in his own rate group at 0%, the effects are the same (if he has completed the plan's eligibility requirements - he counts as a 0.

if the plan has deferrals there is a slight difference - if not excluded from the plan he shows as a 0 on the ADP test.

if excluded from the plan, he is not on the ADP test, but he shows as includable and not benefiting for coverage, a good thing for 401k coverage test - though that is rarely a problem.

assuming such plan is a class plan, if the class is defined as 'owner' he is treated as an owner and would receive whatever % the dad gets, so you have to be careful of document language.

if son is a 'short term' employee, then indeed the IRS would probably frown on such a strategy (e.g. plan has immediate eligibility to get him into the plan but he never ever works 1000 hours andd gets a 0 contribution)

if plan is top heavy, he would get top heavy unless plan excludes key employees. be careful!