401k Plan / Child Hire

[BeanCounterBlues]

Suppose that a sole practitioner professional P.C.-type entity wishes to create a 401k plan for protetction of assets.

Practitioner doesn't have any ee's but could use some office help. Practitioner decides to hire minor child after school for bona fide employment purposes such as filing, and other tasks suited to the ability of the child. Assume no hazardous work / no violation of child labor laws. Assume work tasks are documented as well as the job description in writing and that a fair market hourly rate of pay is paid to child, with W-2 issued at year end, all proper payroll tax filings made, payroll taxes paid etc.

401k plan is safe harbor, offering 3% mandatory contribution. Plan complies w/ all applicable laws, written trust document, notice req'ts, filings, contribution deposits, the whole nine yards.

Child is young (not too young to perform bona fide work) and works about 5 hours a week (assume plan offers immediate eligibility).

Although everything about this situation appears to be legal and bona fide (and I know to be true based on the person who actually asked me this question) - has anyone ever seen someone (like IRS, an attorney, etc) try to and / or succeed in asserting that the plan is actually a one person plan and therefore not subject to ERISA (eg throws out the validity of the child hire)?

Thanks for any input.

[401king]

First, if it is a child then just set the age requirement to be 21, then it would remain a 'one person plan' because the child wouldn't become a participant for at least a few years. My understanding is that all plans are subject to ERISA guidelines regardless of the number of participants.

Second, if you are establishing a one-person 401k, why a safe-harbor contribution? That is rather limiting for the employer and they should be passing all testing requirements as there are no non-key/nhce to compare them to.

My two cents; I might not even be answering the question you've asked.

[Jim Chad]

As far as I know, an owner only 401(k) is not subject to ERISA. I think Title 1 tells which plans are subject to ERISA.

That is why if you are late filing a 5500 for an owner only plan, you only have to deal with the IRS.

[K2retire]

Is the objective here to include the child, or retain the exemption from filing Form 5500? If you want the child in, you should have no or low age requirement and no or low service requirements in the document. If you want the child out, require age 21 with 1 Year of Service for plan entry.

I've had many clients who paid their children a salary so that they could be included in the plan. Often the "work" was nothing more than appearing as a model in advertising. I haven't seen any that were audited, however.

[Jim Chad]

Asset protection is the goal and the protection is higher for an ERISA Plan than for a non- ERISA plan. SO I think the goal is to include the child if it will change an owner only plan into an ERISA Plan.

R... Is this right?

[BeanCounterBlues]

From R: yes that's right. Asset protection is the goal. Will include the child to subject the plan to ERISA and thus the higher protection.

P.C. owner does not want to have any staff but is seeking to get retirement assets out of IRA arrangement. Currently the owner contributes to a SEP for himself. If the 401k is installed he would simply make his contribs to the 401k. He would use 3% safe harbor in order to give the child some kind of account balance w/o the arrangement costing the owner an arm and leg in terms of contributions (eg avoids profit sharing allocation to child which could be more costly).

The need for office help is valid and the child would be providing bona fide valuable services. The child is quite young however (not too young to provide the services).

The business owner's concern is could someone try to assert that this arrangement really is a one person plan because the sole purpose of hiring the child was to get the plan subject to ERISA (and therefore its protections). We of course wouldn't divulge that to an attorney or auditor but it wouldn't be too hard to figure out.

The business owner is not trying to "pull" anything and the work the child would do is completely valid.

However, as we all know maintaining a 401k plan is a lot of work but in the opinion of the person who asked me the question is worth it for the asset protection. But if the mere act of hiring the child to accomplish the goal could be defeated by a court then what's the point of installing the 401k plan.

Just wondered if anyone had any experience w/ this. Thanks again for any input.

[Jim Chad]

FWIW I think it will make the Plan subject to ERISA.

Of course a court may do anything, but certainly this position is defensible.

And If the child uses the ROTH provisions, I think the case is even stronger