Does wife become a Key Employee if she is not an employee at the time

[Earl]

Dad owns a company. Son and his wife are employees. Son is a Key Employee, wife is not. Wife quits but account balance stays in plan. Two years later Dad retires and son becmes owner. Wife is still not an employee. Does her account balance become includable as a Key Employee balance for Top Heavy?

She is "Key" but is she "Employee"?

Would it help to pay her out before ownership change? Or would she be added back in and converted to a Key Employee balance for 5 years?

[Guest Mr. X]

I wouldn't think the fact that she is no longer employeed would be a factor in determining wheter or not she is a key employee. That being said, I would treat her as any other employee who switches status from non-key to key.

However, if you pay her out prior to the ownership change, her status could not change after that date.

This is what makes sense to me, but I did not research it. Anyone else have an opinion?

[Guest MTransue]

My question is when "Dad" owned the company and the wife and son were employees, why wasn't the wife a key employee then through attribution initially?

When did the wife terminate? When is the ownership due to change?

[Guest Mr. X]

The son's wife is not a key in the first place because there is no double attribution. Attribution from father to son, but since son has no ownership, no attribution to son's wife.

[Guest MTransue]

Mr. X, I apologize...I took it to mean "his wife" as the Dad's wife, not the son's. I understand the double attribution rules.

[Earl]

sorry for any lack of clarity..."his wife" was to mean the son's wife (owner's daughter-in-law).

Son initially had no direct ownership, only through attribution.

[Guest]

remember, when considering account balances, you exclude distributions after 5 years OR terminees after 5 years. so paying the wife out has no effect on anything.

for example, suppose wife quit 6 years ago. you would not count her. now she gets paid out. you don't magically all of a sudden count her again. she has been gone long enough.

people get in a bad habit of counting everything from the year of distribution rather than year of terimation.

my guestimate is that yes, all of a sudden she becomes key, but she will only be in the test 2(?) more years.

[Earl]

My thought on paying her out is that it makes some sense to convert a terminee with an account to the Key balance, but less sense to convert a prior distribution to an employee who was not Key at the time of the distribution.

Reading the Q&A of 1.146-1, T-1, for 416 an employee is an individual currently or formerly employed. So that makes me think that the person is converted to Key until the 5 years with no service period runs.

So maybe that is the answer.