Eligibility Age for 401(k) Plan

This one is new to me, so I wanted to check.  We have a potential new client, who plans to employee their 10-year old son (I'm not really sure of the specifics, to be honest).  So the question is:

1) Can someone legitimately have a 10-year old on their payroll?
2) If they are allowed to be on payroll, could they then allow them to participate in the 401(k) Plan?

The whole thing seems a little odd to me, but they are asking questions so I wanted to try and get the correct answers.

Thanks!

1. CAN it be legitimate? Yes. IS it legitimate? Facts and circumstances. Really a question for the CPA as to whether the child is a bona fide employee, IMHO.  

2. Yes.

Always trust that gut feeling. 

Look into the Child Labor laws in the State where the 10 year old is being "employed."  I would imagine that employing a 10 year old (at least during school hours) is likely not allowed. But, I don't know the specifics of your facts.

I would caution you to be very careful. If you have any doubts, ask this potential client to get an opinion of an employment attorney on this matter.  

1 minute ago, Belgarath said:

1. CAN it be legitimate? Yes. IS it legitimate? Facts and circumstances. Really a question for the CPA as to whether the child is a bona fide employee, IMHO.  

2. Yes.

Sorry, but I respectfully disagree on your point about the CPA. This is actually a legal matter-specifically the various employment statutes in the state.

No need to be sorry - disagreements are welcome and informative! Since I'm neither a CPA nor an attorney, let me ask this further question: Does a CPA have the authority to  make this determination under their license/designation/whatever,  since the CPA must know whether the employment is legitimate, in order to calculate deductions, etc.? Does a CPA refer all such questions to an attorney? 

It's correct that the CPA would have to confirm that the employment is legitimate. However, I hope that the CPA (for his or her own good) would seek legal counsel on this issue because applicable state laws on minimum employment age are not always clear cut. 

Not saying this is or is not legit, but minor children often have bona fide work in their parent's businesses (and not just sneaker factories in southeast Asia). I have seen one-year-olds on payroll as they appear in marketing materials and TV ads. They could be self-employed, think maybe the E-Trade baby/toddler - sure hope the little dude has a Roth IRA or 401(k)! - so why not an employee?

Sure, there are child labor laws, and a red-flag warning that something "funny" is going on would be a plan design with 1000-hour YOS eligibility that somehow the 10-year-old satisfied but other employees did not. But agree you should want and get some assurance, whether from CPA and/or attorney.

I'm not a CPA or Attorney either so good to get one or both involved.

That said my understanding is the for Federal purposes owners can hire their kids provided it's not in a "dangerous" position like mining, manufacturing, etc. State laws vary and might be more restrictive so probably best that the owner run it by their employment lawyer. And compensation needs to be "reasonable for services provided" which is a matter for the CPA.

But if the owners kid's are reported as employees on the census, I don't think it's the TPA job to make a determination whether or not they should be there.

1 hour ago, Lou S. said:

But if the owners kid's are reported as employees on the census, I don't think it's the TPA job to make a determination whether or not they should be there.

This.  Just like you are not supposed to have someone who is in the country illeagly on payroll, but if you do and they meet eligibility, you need to account for them.

It certainly is possible, and there are potential pitfalls.  FYI, there are several high-profile IRA providers that market IRAs for children to let them shelter income received for work.  There also is guidance available for having kids in a 401(k) plan.  Here are some examples:

• https://www.fidelity.com/learning-center/personal-finance/retirement/turbocharge-childs-retirement
• https://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp
• https://www.nerdwallet.com/article/investing/why-your-kid-needs-a-roth-ira
• https://www.forbes.com/sites/jamiehopkins/2021/03/15/the-how-tos-and-benefits-of-a-minor-participating-in-401ks/?sh=47564b935a48
• https://www.cbsnews.com/news/kids-and-money-start-them-early-with-a-family-401k/

Start your own family 401(k) today (if you can get your kids to do the work to earn a legitimate wage)!

Jamie Hopkins’ Forbes article quotes me for the idea that a participant, on reaching age 18 (or 19 or 21, if an arguably relevant State law sets that end of minority), is unlikely to disaffirm elective deferrals made while he was a minor.

“If mom’s business gives her son a paycheck, a tax-favored savings opportunity, and a matching contribution, how likely is it that a first-year college kid will disaffirm his teenage years’ 401(k) contributions? And if he did, mom could get back her matching contributions and the investment gains on them.”

https://www.forbes.com/sites/jamiehopkins/2021/03/15/the-how-tos-and-benefits-of-a-minor-participating-in-401ks/?sh=10656eae5a48

I do want to say I have seen this and the first time, I was a red flag for me.  Our compliance manager drafted a letter for the plan sponsor, letting them know about the child labor laws, etc.  I want to say the child was 12.  I have seen this more recently at my current job, and the children were even younger than 10.  They were used in marketing the product/whatever.  in neither case were any children ever eligible for the plan, they just showed up on the census as being children of the owner and rec'd comp for the year.