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Family member of HCE not eligble for 401k matching at same business as parent?

My firm just informed me that I am not eligible to receive a matching contribution from the lawfirm because my father (another attorney) is a partner in the firm with substantial compensation. He is assuredly in the "highly compensated employee" category. I AM NOT. I was told that because he is a shareholder in the LLC (well, technically PLLC) that I have some undetermined benefit from that and am therefore ineligible. I looked at the 26 U.S.C. 414q and I don't see how I, as a family member and non-dependent, am ineligible. Does anyone know? BTW, the 401k plan itself does not exclude me nor does the lawfirm. The CPA from the 3-party administrator however told our accountant (with very few details) that I was excluded (and that any children or spouses of any of the partners would be too).

Dec 05, 2013 by Ryan from Fayetteville, NC in  |  Flag
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2 votes

Hi Ryan, It sounds as if your plan is top heavy and is failing the non-discrimination tests that must be done. HCE's are individuals who earn over 115K (in 2013). Plan sponsors also can elect to limit the number of HCE's to the top 20% of all employees ranked by compensation. However - if these HCE's also own more than 5% of the business during the year, family members may also be considered HCE's because your father's stock is also attributed to you.

The intent behind the laws are basically to prevent family-owned businesses from using plan matching dollars to benefit only (or mostly) their own families while ignoring their employees - and still getting a tax deduction from it. Of course, owners can take as much money from their businesses as they like - but you have to play by certain rules in order to get the tax breaks that accompany the Qualified Plans.

In this case, I would strongly suggest that your company look into a Safe Harbor plan. If they are failing the Anti-Discrimination tests (ADP and ACP) - so they have to back off on matching dollars - then by amending the plan to include a safe-harbor provision may solve your problem - but it may also require a more robust match into non-HCE accounts than is presently happening.

Either way, I would agree with you that something still sounds strange. It is not uncommon for HCE's to have refunds from their own deferrals because they put too much money into the plan compared to non-HCE's. But simply disallowing YOUR match, while others get the match, sounds like something is awry in the plan itself. It is possible that there is a "top-hat" type of plan that you haven't been allowed into yet - but may be offsetting the match from the other HCE's - and you are inadvertently included in those calculations because of the stock attribution that is occurring as a result of your father's ownership in the firm. It sounds like a little detective work and a consultation with your company's plan advisor is in order.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Dec 05, 2013 from Jacksonville, FL

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Great answers above and yes, it's lousy that because your father is part owner, you're lumped into the HCE category. One more thought - it's actually permitted to discriminate against HCEs. In other words, they may have the plan set up to match only non-highly compensated employees.

Comment   |  Flag   |  Dec 10, 2013 from Alexandria, VA

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Jonathan provided you with a great answer and good details. I totally agree. My real concern is who is actually making the suggestion that you do not participate in the match, the TPA, or the firm? Are they saying they advise you shouldn't participate or telling you that you can't participate? My suggestion is to make a written request for an explanation in writing detailing the reasoning behind this restriction. Good luck!

Comment   |  Flag   |  Dec 05, 2013 from Milwaukee, WI

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