Family employees can have different savings goals, but ownership attribution may cause them to be treated as HCEs. A family member with lower pay is not automatically an NHCE.
The business and its goal
A family company employs its founder, the founder’s spouse and an adult child in real compensated roles, plus two unrelated employees. For this fictional example, the family members are HCEs under the applicable ownership attribution rules. Each has a different employer contribution target.
What the allocation could look like
| Participant | Age | Compensation | Rate | Employer dollars |
|---|---|---|---|---|
| Founder | 60 | $300,000 | 15% | $45,000 |
| Spouse | 56 | $150,000 | 12% | $18,000 |
| Adult child | 35 | $100,000 | 3% | $3,000 |
| Employee A | 28 | $50,000 | 5% | $2,500 |
| Employee B | 32 | $50,000 | 5% | $2,500 |
| Total | — | $650,000 | — | $71,000 |
Family members receive $66,000 combined, and the two unrelated employees receive $5,000 combined. Total employer funding is $71,000. The adult child receives 3% while NHCEs receive 5%; the highest HCE rate of 15% drives the common gateway.
Illustration assumptions: A standalone defined contribution plan; all people shown are eligible for the illustrated employer contribution; owners and other specifically identified HCEs are highly compensated employees; remaining staff are non-highly compensated employees (NHCEs). Compensation is eligible plan compensation. Employer dollars include any safe harbor nonelective contribution; employee deferrals, catch-ups, matching contributions and fees are excluded unless stated. These are fictional planning examples, not completed nondiscrimination tests. Final allocations may differ.
Why the family classification matters
If the adult child were mistakenly counted as an NHCE, the test population and result could be wrong. Family attribution rules can treat certain relatives as owners for classification purposes even if no shares are directly in their names.
The younger family member can also create a different benefits-testing comparison from the founder. Giving that person a modest contribution may fit the objective, but each applicable HCE rate group still needs review. Family employment does not create contribution capacity without actual eligible compensation.
What could change the result?
Disclose family relationships, ownership and all other businesses. Succession, gifting shares, admitting a child as an owner or changing wages can alter the facts. Keep the employment and compensation information consistent with payroll and tax records.
Ages and rates in these tables illustrate the design conversation; they do not certify a passing allocation. Actual testing uses individual data, the plan’s provisions and applicable assumptions. Contributions already funded must be reconciled before any remaining amount is instructed.
What to ask your provider
Ask the provider to confirm HCE and key-employee status separately for each family member, then show the allocation and testing consequences of the family’s actual savings goals.
Bring the complete census and current plan documents. For the basic comparison, read new comparability versus pro rata; for the minimum-contribution calculation, see the gateway guide.
Explore the next step
Try the free scenario calculator with hypothetical inputs, or compare more allocation examples. The methodology guide explains what the calculator does and does not test.
Sources & further reading
- Treasury Regulation §1.401(a)(4)-8: cross-testing and the gateway
- Treasury Regulation §1.401(a)(4)-2: contributions and rate groups
- IRS Notice 2025-67: 2026 retirement plan limits
- Internal Revenue Code §414: related employers and special rules
- Treasury Regulation §1.401(k)-3: safe harbor requirements
Educational content updated September 27, 2026. Examples are fictional; they illustrate funding choices and do not constitute final testing or plan-specific advice.