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HCE Attribution Rules Between Parent and Child
(Posted December 21, 2000)
Question 69: An employee who owns 3% of the company is an officer. He earns more than $85,000 annually, so he is both a "highly compensated employee" (HCE) and a "key" employee for top-heavy testing purposes. Is his daughter considered an HCE or a key employee?
Answer: Not necessarily. For both key employee and highly compensated employee purposes, the daughter is deemed to own all of her father's stock. That means she is deemed to be a 3% owner (more if she owns some outright, of course).
But being a 3% owner isn't enough. If Dad owned 6%, she would automatically be a key employee, but a 3% owner doesn't do it. She would have to be an officer, be one of the "top 10" employees, or have compensation exceeding $150,000. And those things aren't attributed. Dad's being an officer doesn't make her an officer, for example. Dad's having high compensation doesn't mean she is treated as highly paid.
Similarly, to be a highly compensated employee under 414(q), she must be either a 5% owner (not true in your situation) or have compensation herself over the $85,000 threshhold, as adjusted.
In other words, all that the attribution rules attribute is the ownership of stock, partnership interests, etc. They do not attribute status as an employee or officer, nor do they cause attribution of compensation.
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