401(k) family exclusions?

[Guest hud9man]

I have a client. Client works for his father's company (a merchandising company). This particular client needs to accumulate retirement assets, so I advised him to begin contributing to the company's 401(k) plan (he told me they have one).

Upon our next meeting, the client tells me he is excluded from contributing to the plan. I can only find one particular reason he would be excluded: he is working there under some form of contract that prohibits him from contributing because he is the son of the owner of the company.

Has anyone had any experience with a situation like this? Am I missing an obvious rule/regulation?

Edit: I should add, he satisfies all other service requirements.

[ESOP Guy]

There is no rule that keeps a child of an owner out of a 401(k) plan.

Since there is so little data one can only speculate as to why the son is being kept out.

The most likely reason is because he is the son of an owner he is automatically a Highly Compensated Employee (HCE).

And IF this plan needs to pass the ADP/ACP tests doing this helps the plan pass. In those tests the group average rate of deferral and match for the HCEs can only be higher than the Non-highly Compensated Employees (NHCEs) by a small amount. So if the son isn’t allowed to defer he is a zero and that helps keep the HCE group average down. In short the father is using the son’s inability to defer to allow him (the father) to defer more. Simple example: If the father is putting in 10% of compensation and the son is required to put in 0% of compensation the group average is 5%.

Once again I am GUESSING at this point with the above. One would need to know more facts to stop guessing. This seems like one of the more common reasons one sees what you are seeing.

If the company uses a TPA to help them run the plan they should talk to them. They should be able to spell out a number of strategies that allows the father and son to meet their goals while working within the constraints of what everyone can afford. But only someone like the TPA working with the company will have enough facts to help you more.

edit:

minor typo

[Guest hud9man]

There is no rule that keeps a child of an owner out of a 401(k) plan.

Since there is so little data one can only speculate as to why the son is being kept out.

The most likely reason is because he is the son of an owner he is automatically a Highly Compensated Employee (HCE).

And IF this plan needs to pass the ADP/ACP tests doing this helps the plan pass. In those tests the group average rate of deferral and match for the HCEs can only be higher than the Non-highly Compensated Employees (NHCEs) by a small amount. So if the son isn’t allowed to defer he is a zero and that helps keep the HCE group average down. In short the father is using the son’s inability to defer to allow him (the father) to defer more. Simple example: If the father is putting in 10% of compensation and the son is required to put in 0% of compensation the group average in 5%.

Once again I am GUESSING at this point with the above. One would need to know more facts to stop guessing. This seems like one of the more common reasons one sees what you are seeing.

If the company uses a TPA to help them run the plan they should talk to them. They should be able to spell out a number of strategies that allows the father and son to meet their goals while working within the constraints of what everyone can afford. But only someone like the TPA working with the company will have enough facts to help you more.

edit:

minor typo

Fantastic information. I will gather more details. Thanks.