May a young child participate in a safe-harbor 401(k) retirement plan?

[Peter Gulia]

A business owner employs her children (all younger than 14) as employees of her business.

 

The employer’s employment-law counsel has vetted these jobs as proper under Federal and State child-labor laws.

 

The 401(k) plan’s document does not impose age 18 or any age as a condition.

 

Assume each child’s employment involves real work with no more than reasonable compensation.

 

Could anything under ERISA or the Internal Revenue Code preclude such an employee from making elective deferrals and getting the plan’s safe-harbor matching contributions?

 

[K2retire]

I believe under the circumstances that you describe that the child MUST be allowed to participate in the plan.

[Lou S.]

I agree with K2. Under the Plan document, what would keep them out of the plan?

[RatherBeGolfing]

Yep, I agree with K2 and Lou.  

[Peter Gulia]

K2retire, Lou S., and RatherBeGolfing, thank you for your prompt good help.

 

[CuseFan]

Ditto, and I've seen designs where babies (literally) were employees because they were paid for being in promotional adds for the company - although in those instances it was to have more non-benefiting HCEs to help pass testing rather than increase family benefits, but it could work that way too. As long as they get a W-2, actually work and the pay is reasonable (and they follow child labor laws), it's all good man.

[Larry Starr]

I'm surprised there is even a question here; in fact, adding children to the payroll for legitimate purposes and then limiting their contributions to zero actually is a favored method to produce better demographic testing results since the children are HCEs by definition and now we have HCEs with a zero allocation in our various averages and rate group testing.  Can be very helpful in in getting better results for general testing.

[Peter Gulia]

I had not thought there was a problem.  But an employer heard (or misheard) its retirement-services provider say "ERISA" precluded the participation.

 

[Larry Starr]

Usually, in a situation like that, I inform the client that what they heard is definitely not true, and ask them to have the advisor who they believe said that call me asap so we can talk about it and I can help make sure they aren't giving out bad advice to other clients.  It reinforces the relationship with the client and makes them feel good that you are willing to help make sure their other advisor has the right information. FWIW.