Non Discrimination testing

[Gary]

I am essentially reviewing a combined DB/DC plan that I did not work on in prior years.

A couple of points to address.

The plan is a doctor and employees.

DB plan mostly for doc and his wife and PS plan for employees.

Issue #1

There are three employees who are children of the doc's spouse from prior marriage. They were not coded as key HCEs in prior years; however as I see it they should all be key HCEs. Am I missing something?

Issue #2

2 of the children from prior marriage and one child of both spouses each received compensation of under $200 in each of the past couple of years. They were included in the testing and by considering 2 of them NHCEs their high rates helped non discrim testing. Of course if they are now moved over to HCEs they would make testing more difficult.

It seems that individuals with such low pay should not be included in the non discrim testing; or at least when they were considered NHCEs.

Any thoughts on including such low paid EEs in testing?

Thanks.

[K2retire]

Unless their mother directely owns part of the business, the step children are not HCEs. You can't attribute the ownership more than once (once to wife, then to her kids).

If a low paid employee has met eligibility, on what basis would you exclude them from the testing?

[Tom Poje]

back in 2004 the IRS issued a memorandum expressing their concern about using short term employees to help pass testing, even though such employees satisfy all the other conditions for nondiscrimination purposes. of course, in their example it was a matter of providing low paid people at the expense of other NHCEs so its not quite the same, but the memorandum does give insight into the IRS thinking.

You indicated the people received less than $200. Did these people ever work 1000 hours, or perhaps, they most likely have a break in svc, so are they even eligible anymore?

Sounds like a good fact and circumstances situation. I'm not saying they shouldn't be included. for instance, if I was running an ADP test and they were eligible to defer, then you would have to include them in testing.

[John Feldt ERPA CPC QPA]

If the doctor adopted the kids, then they are certainly HCEs.

Do they live in a community property state? If so, some have argued that the spouse therefeore is a direct 50% owner, and thus the kids are HCEs.

Some also argue that community property state laws merely attribute the 50% ownership to the spouse, and another set of attribution to the kids would be double-attribution which is not allowed, and thus they are not HCEs.