Are family members of a key employee also part of the 25% limitation?

[Guest NANCYVALARDO]

For corporations, the 25% rule is the maximum overall plan participation for key employees.

My question is, on the C-corp are the family members of the key employees also part of the 25% for the company pretax?

We do our coding here at ADP as owner/key as follows: XN11P

Would we code the children and spouse the same?

[SLuskin]

I don't know about the coding, but if you can attribute the stock according to section 318 (I think that's the right number) then they are also considered key. You can only attribut stock once. For example. Dad owns the company. His married daughter and her husband both work there. The daughter is a key employee, but the husband is not.

If it is the daughter's company and both her father and her husband work there, you have to consider them all key.

[Kristina]

The 25% limitation you reference is the 415 limit. It is an individual limitation. The family member scenario is family aggregation, which has been discontinued. The family attribution rules under Section 318 pertain to the determination of who is a key employee or a Highly Compensated Employee which is a different issue than the 25% of pay limitation.

[Lisa Hand]

Kristina, the 25% rule being refered to is the one for Cafeteria Plans. The key employees can not account for more than 25% of the over all plan in a corporation (in any structure other than a corporation such as S corp, partnership, LLP, LLC ect greater than 2% shareholders/owners may not participate at all) Thus the defination of key employees and whether it includes family memebers is what is relevant.

[Kristina]

Lisa, Thanks for setting me straight on this. I was assuming that the question referenced a 401a plan. Ouch, that assume thing will get you every time. For my further education, does section 318 govern who is a key employee for the purposes of a cafeteria plan?