Attribution for ASG vs HCE

Section 318 attribution applies for determining ownership for ASG and HCE purposes.  Can a child be an HCE through attribution if the child is not an employee?

Example:  Company A is owned 95% by father, 5% by unrelated individual.  Company B is owned 100% by adult son.  Company A and Company B are both service organizations.  Company B receives 80% of revenue from Company A.  Child is not an employee of Company A.

Under the B-org definition of ASG, child is deemed a more-than-10% owner of Company A (the FSO) but is he deemed an HCE of Company A?  He is deemed a 5% owner for HCE purposes but he's not an employee. 

All other requirements of B-org are met.  Is there an ASG?

Thanks for your comments.

If the son last worked for the father's company, during a year when the father was at least 10% owner, then the son would be a highly compensated former employee under 414(q), and yes you have an ASG.

The son never worked for the father's company.  My concern was whether the attribution as a 5% owner would deem him an HCE even though he wasn't an employee (now or in the past).

Yeah, umm, ok; I was hoping we'd get one of the attorney's to weigh in here by now...  I'm stuck in a kinda chicken vs egg debate over this one, because if you have an ASG, he's an HCE of the ASG as they are all one employer then, but if he's not an HCE...  Is it a problem either way?  Can you easily prove disaggregation and rely upon separate testing, as if they are an ASG?  Or does one entity have a testing problem and you need then to be combined to get it to pass?

The problem is that Company A (the father's company) has employees, and a defined contribution plan.  Company B (the son's company) is just starting up, will have no employees other than the son and he wants to set up a rich pension plan.  That pension plan would not pass testing if they're an ASG.  So, back to the original conundrum...is son deemed an HCE of Company A (even though he is deemed a 5% owner of Company A, he is not and has never been an actual employee of Company A)?  If no, then no ASG.  If yes, then there is an ASG.

On 3/22/2022 at 11:23 AM, cathyw said:

Can a child be an HCE through attribution if the child is not an employee?

414(q) defines an HCE as a 5% owner. It's a status. I don't think you have to be a employed by an entity to be an HCE of it under the definition.

If the services performed by B can be categorized as management services, you would have a 414(m)(5) management services group as well, apart from the HCE issue.