Are adult children of 5% owners automatically HCEs? Are minor children

[richard]

Are adult children of 5% owners automatically HCEs? Are minor children of 5% owners automatically HCEs? What are the cross testing ramifications of this?

It seems per IRC 318 that adult and minor children of 5% owners are HCEs. This would cause difficults in a typical cross testing situation because of their youth. (Typical situation being defined as a company with one or two older owners and a bunch of young and middle aged rank & file employees. Now add a couple children of the owners on the payroll.) They would have to get a small contribution %, not the large contribution % like other HCes.

If the children are in fact HCEs, what solutions are out there in these typical situations?

[Guest]

in such situations, usually you define your classes something like the following:

class 1 owners and spouses of owners but excluding children of owners

class 2 children of owners

class 3 rank and file

or something similar, as long as the classes are well defined it should work. I've seen plans that specifically list each doctor by name in a specific class!

but yes, you are correct. by attribution, you have young HCEs

[lkpittman]

Tom Poje is right...all that you mentioned are HCEs due to attribution and will be included as such in the testing. We've classified as follows in some situations:

1. Shareholders, defined as any employee of the corporation who owns ____% (fill in desired amount) or more of the stock in any corporation adopting the plan, without regard to the attribution rules of Sec. 318.

2. All other employees.

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LKP

[richard]

Thanks, that's what I thought.

[Guest]

Can defining classes by percentage of stock ownership also be used to exclude spouses when this is desired?

[Guest]

I have seen something similar to the following in a document:

class 1 Direct owners

class 2 owners by attribution (via code 318)

class 3 all others

[Earl]

to moderator: naming members of groups?! I always thought that was nixed. Particularly for creating inelig. classifications. I always thought that logic would extend to rate groups. Did those documents you have seen have DLs? Amazing!