Ownership Attribution of Related Employees

The company risk characteristics of ownership attribution including family and relatives can elevate compliance risk.

Plan Design Risk: Relatives are owners too

Due to ownership attribution rules, family businesses can face the same challenges as businesses that have a high proportion of owners. Employees who are the spouses, parents, children, or sometimes even grandchildren of owners can be treated as having the same ownership stake of a business when determining Key Employee status.  

Example: Alice and Ben own 100% of Family Farms and their 401(k) assets make up 40% of plan assets. Charles, Diana, and Eric are Alice and Ben’s children, who work at Family Farms, and together their assets make up 25% of plan assets. Because children are considered Key employees due to attribution of their parents’ ownership, and Key employee assets for Family Farms make up 65% of plan assets. The plan is top-heavy. 

  

If relatives are working for your company, know that these employees may be considered Key employees whose deferrals may affect compliance testing results, even if they are modestly compensated and do not hold any ownership in the company itself. 

 

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