409(p) and family

[Guest tmills]

Assume the following:

A owns shares in the ESOP company (S Corp) outside the plan. Therefore, he has no deemed owned shares.

B is A's nephew, is a plan participant and owns shares inside and outside the plan.

C is B's son, is a plan participant, and owns share in the plan only.

If we analyze A through the 409(p) family rules, B and C are included as family even though A has no deemed owned shares. However, since A has no deemed owned shares, he is not a DQP. If we do the same analysis for B, C is included but it does not appear as if A would be included in a family group b/c he is not a spouse, ancestor or lineal descandant of the individual or spouse, brother/sister or lineal descendant of a brother/sister, or spouse of any of those people. That is unless he is included as a non-lineal ancestor. Is he?

Assume B has 11% deemed owned. As a result, B and C are DQPs. Assume for purposes of the 50% test, they are at 20% when outside shares are included. If the answer to the first question is yes, then A's outside owed shares come into the test as part of an aggregate A,B,C family group. If the answer to the first question is no, then A's outside shares stay out of the test and there is only the B and C group. Agree?

[BeckyMiller]

I feel like I need the sentences diagrammed here.

I agree that an uncle is not an ancestor is we are testing relative to B.

But, I am worried about your statement that because A owns no shares within the ESOP, he owns no "deemed shares." You need to look at synthetic equity. With the inclusion of any deferred compensation arrangement that is subject to IRC Section 404(b) in the definition of synthetic equity, you are likely to have some deemed shares.

[Guest tmills]

I feel like I need the sentences diagrammed here.

I agree that an uncle is not an ancestor is we are testing relative to B.

But, I am worried about your statement that because A owns no shares within the ESOP, he owns no "deemed shares." You need to look at synthetic equity. With the inclusion of any deferred compensation arrangement that is subject to IRC Section 404(b) in the definition of synthetic equity, you are likely to have some deemed shares.

Thanks for the response, I was starting to think no one was out there. The question is based on an actual situation. I understand the synthetic equity issue, but there is none here. Given that, are you still worried about the statement that A has no deemed shares and therefore is not a DQP? I think the major issue is do A's shares come into the 50% test if B and C are DQP's? It sounds like they don't.