Multiemployer 401(k) ADP Testing

[Guest Stephen Magowan]

In a multiemployer 401(k) plan of around 40 employers, some of the smaller employers include children of the owners in the CBU. These children participate in the plan. The businesses affected are among the smallest in the plan (say 5 or fewer employees). Is there any argument to be made that the children should not be considered owners and thus highly compensated for ADP testing purposes? I am thinking of the rule that states for general purposes of determining whether an employee in CBA 401(k) plan is an HCE you look at the total plan. Could I argue that mom and pop own less than 5% of the equity of the group taken as a whole (which they certainly do)? Is there another avenue I am missing?

[This message has been edited by Stephen Magowan (edited 12-31-1999).]

[KJohnson]

I have never thought of this issue. You can clearly aggregate bargaining units for purposes of ADP testing so that you test all collectively bargained employees together.

I would seriously doubt, however, that you could use the same rule for ownership. You clearly have to disaggregate the owners and test them on an employer by employer basis because they would not be collectively bargained. Since the children have "constructive ownership" of their parent's stock, I would think that you would be hard pressed to test the ownership in a different fashion. Under your scenario, if you had a multiemployer plan with over 20 employers you could never have a child or spouse of a 5% owner.

I guess I have some other question as to whether the children would be "collectively bargained." Under labor law, there are a number of instances where children of owners are not considered part of the bargaining unit. All non-bargaining unit employees must be tested separately on an employer by employer basis.

That said, you still might stand a chance with this argument with the IRS. If you have excluded all owners as non-collectively bargained individuals, and the children are clearly doing work under the CBA, what is the purpose of the constructive ownership rule? Since you are testing "across" employers for other purposes, why not for ownership?

[This message has been edited by KJohnson (edited 01-04-2000).]