ldr Posted October 18, 2018 Share Posted October 18, 2018 Good morning to all, We have a takeover case in which we want to be sure we correctly identify the Key employees. We are not sure because we do not know anything about trusts. I know the following is convoluted but I am not making this stuff up! The company was started by two brothers, who we will call Bill and Sam. Bill is the president of the company, and Sam has passed away. The ownership of the shares of the company are as follows: 24.7% belongs to a Q-TIP trust for the wife of Sam who is not an employee. We aren't worried about this. 41.1% belongs to Bill. That's a no-brainer. He's an owner and President of the company. Key and HCE. Bill's 3 kids are on the payroll. One of them owns 0.8% of the stock outright. Another 15.9% of the stock is in a trust for Bill's 3 kids, who are treated equally under the trust. To our knowledge, the trust and the percentages are irrelevant here. The fact that the kids are on the payroll and their father owns 41.1% of the stock is sufficient to make all of them Keys and HCEs. Now comes the part we are not sure about. Sam, remember, is deceased. Sam's 4 kids are on the payroll too. One of Sam's kids owns 1.6% of the company outright. Then, as in the case of Bill's kids, 15.9% of the stock of the company is in a trust for these 4 kids and they share equally in it. So one son has his own 1.6% that he owns outright plus 3.98% that he indirectly owns through the trust for a total of 5.58% of the stock being for his benefit. His 3 siblings just have the 3.98% each that they own indirectly through the trust. Are Sam's kids Key and HCE or not? We don't know what impact the trust has on making this determination. Our suspicion is that maybe the son who has the total of 5.58% is a Key and maybe the siblings who only have 3.98% are not, because they have less than 5%? We'd much rather hear what the experts have to say than just go on our suspicions. None of these children, neither Bill's nor Sam's, has a sufficiently high salary to be considered an HCE just on that basis. None is an officer of the company with a sufficiently high salary to be considered a Key just on that basis. It's all about the stock. Your advice will be greatly appreciated. Link to comment Share on other sites More sharing options...
C. B. Zeller Posted October 18, 2018 Share Posted October 18, 2018 Maybe there is some subtlety I am missing here but it seems pretty straightforward. The definition of 5% owner in section 416 references the constructive ownership rules of section 318. 318(a)(2)(B) says that stock owned by a trust is considered as owned proportionally by the beneficiaries of the trust. So I agree that the one person who directly owns 1.6% of the company plus is a 25% beneficiary in a trust owning 15.9% of the company is a 5% owner for purposes of 416. Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance. Corey B. Zeller, MSEA, CPC, QPA, QKA Preferred Pension Planning Corp.corey@pppc.co Link to comment Share on other sites More sharing options...
ldr Posted October 18, 2018 Author Share Posted October 18, 2018 @C.B. Zeller Thank you. We are a small shop with small, uncomplicated plans and normally the all of the plan sponsor's stock is owned outright by 3 or fewer people. This is almost certainly the only plan we have where any trusts are involved, so we just didn't know. Link to comment Share on other sites More sharing options...
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