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Attribution for Highly Compensated Employees
(Posted October 7, 2000)
Question 60: Father owns more than 5% of Company X but isn't employed there. His adult son is employed there, but doesn't own any of the stock, and his compensation would not make him a highly compensated employee. Is he an HCE because of his father's ownership, due to attribution?
Answer: Yes. Under IRC 414(q)(1), an employee is a highly compensated employee if he or she is a 5% owner or has compensation of more than a specified amount. The definition of 5% owner is in IRC 416(i)(1). That section defines a 5% owner as someone who owns, or is deemed to own under IRC 318, more than 5% of the company.
Section 318 sets forth the attribution rules used for many purposes, including:
Under IRC 318, there is absolute attribution between parent and child. The age of the child is irrelevant. The employment status of the parties is irrelevant. (See IRC 318(a)(1)(A)(ii).) So, if Father owns the stock, Son is deemed to own it. That makes Son a highly compensated employee in this case.
|Key employee status |
Highly compensated employee status
Status as 5% owner for 401(a)(9)
Owner-employee status under the prohibited transaction rules
Affiliated group ownership
Incidentally, a different set of attribution rules is used for controlled groups, and a third set is used for related parties and determination of disqualified persons under the prohibited transaction rules. All three sets of rules are discussed in my book, Who's the Employer?, with numerous examples. The second edition, due out in a few weeks, includes a chart that compares all three sets of rules.
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