ASG and HCE

Need some clarity here.  Dealing with a typical A-org ASG for a professional service organization.  The partners of an accounting firm (LLP) are each individual PCs.  The PCs receive K-1 share of profits, and then pay W-2 salary to the owner of the PC.  The individual PCs have each adopted the 401(k) plan maintained by the LLP.

Suppose Jane Smith PC owns 4% of LLP, and Jane Smith owns 100% of Jane Smith PC.  Through 318 attribution, Jane Smith is deemed to own 4% of LLP, but she also owns 100% of Jane Smith PC which is a participating employer in the 401(k) plan.  Is Jane Smith a 5% owner for purposes of determining HCE status?  The plan uses top paid group and she falls below the top 20% in salary.

We have a difference of opinion here.  Is there any authoritative guidance on the correct analysis?

Thanks.

My understand for HCE/KEY ownership is you look at the largest percentage owned of any entity in the CG/ASG so Jane smith would be 100% due to her 100% ownership of Jane Smith PC.

But if someone has a definitive cite I wouldn't mind be wrong on this one.

I think Lou is correct. The regs define the employer as the sponsor and any other entity required to be aggregated under the CG and ASG rules, so if you are a 5%+ owner of any entity in the group you are a 5% owner and an HCE. 

Otherwise, you could have 21 equal partners owning less than 5% of the partnership, but 100% of their own participating S-corp PCs, then pay themselves W2 under the HCE comp limit so no one would be an HCE. Then they could adopt a rich plan or plans for themselves and exclude anyone else because there would be no HCEs.

But if Lou and I are not correct, I call dibs on the design in my second paragraph!

Agreed. Take a look at IRC 414(q) - I think this gives adequate citations and cross references. See particularly 414(q)(7).