Minor Children and 401k Eligibility

[JH1]

Client A owns two companies. The first company employs all non-family members. The second company employs his wife and three minor children, twins that are 7 years old, and a 2 year old. The client wants to start a 401(k) plan and have the two companies be part of a controlled group.

Question - are the minor children truly eligible for the 401(k) plan? What would that do to year end testing if they were?

[John Feldt ERPA CPC QPA]

415 compensation, and the 415 limit based on compensation is based on reasonable compensation for services provided to the employer. Are they receiving reasonable compensation for such services provided? They can be paid, sure, but if zero is the reasonable amount, then 100% of zero is their maximum allocation.

If you are the TPA, this question likely needs to be discussed and answered by the client and/or their CPA.

[Lou S.]

7 & 2 are pushing the bounds to pass testing in my humble opinion. But maybe there is some reasonable rationale for hiring such young kids and putting them on the payroll. I agree with John's recommendation that this is a decision for the client/CPA/employment attorney and not for you as the TPA to decide.

[K2retire]

I've had several clients pay their young children to model for advertising. Coincidentally, they almost always earn whatever the IRA limit is.

An eligibility age requirement could solve the issue.

[Tom Poje]

given the possibility they could actually be eligible,

1. if they don't defer they show on the test with 0 and that helps testing

2. if they actually defer you can always test otherwise excludable employees separately, and as long as you have new NHCEs in that group that portion will pass testing. (ees less than 21 can be tested separately)