Family attribution question

[Cynchbeast]

Husband owns 100% of CA business. In determining HCE status, is wife HCE solely due to family attribution, or is she also HCE as an owner of the company (due to attribution or community property rules)?

Explanation - plan excludes HCEs who are HCE due to family attribution rules.

Purpose is to exclude kids, not wife. I say this excludes wife, too. My boss thinks not.

[RatherBeGolfing]

I'm not sure there is enough information here. In a community property state, property can be owned separately, either because it was one spouses property before the marriage, or because it is treated as separate due to an agreement to treat it as such.

Does she have 50% interest under CA law? If yes, then I would say she is not excluded. If no, then she is excluded. Either way, this is a perfect time to amend your plan language to remove any confusion

[ETA Consulting LLC]

Either way, this is a perfect time to amend your plan language to remove any confusion

That amendment should merely clarify what the "Plan Administrator" meant when they requested the provision. This is not a Regulation, but merely a provision someone requested to be put into the plan. Many plans include a provision that states that "The Plan Administrator" has the responsibility for interpreting the plan's provisions.

There was a court case once where participants challenged the meaning of a plan provision. When the courts ruled, they suggested that the plan could've been written to given the Plan Administrator the responsibility of interpreting the provision. So, the standard is not "the best" interpretation; it is merely a reasonable interpretation (e.g. not arbitrary and capricious).

I could probably write a book on this, but want to illustrate this point: When a plan sponsor requests a provision to be included in a plan, that provision may not be articulated in the best manner. That doesn't change how the provision gets administered (i.e. you said Attribution but this is a common law state) as long as the interpretation is consistently applied (e.g. not changed after consider who is affected).

When Congress changes the Code, we look to the IRS to issue Regulations (which is basically their interpretation and insight into how they plan to enforce that provision). This type of provision isn't like that. In such instance, you'd ask the plan sponsor what was meant when they wrote is and then write another amendment to merely clarify the meaning of the current provision. There was actually a court case where this was done and not considered to be 411(d)(6) violation because the new amendment was merely a clarification to an already existing provision that was poorly articulated.

Good Luck!

[RatherBeGolfing]

That amendment should merely clarify what the "Plan Administrator" meant when they requested the provision.

Absolutely.

What I really wanted to say (but I was watching college football and I'm lazy) is that there are better ways to word the exclusion in the document so that you only exclude those you want to exclude and avoid having a surprise down the line when someone else falls into that category. To me, it is simply a matter of being clear and keeping it simple.

In this case it is pretty clear cut. If she is an owner under California's community property laws, then she is not excluded. If she is not an owner under CA law, she is excluded. It sounds simple, but we also have to remember that just because it is CA it doesn't mean it is community property. So the real question is, is she an owner under CA law?

J