Safe Harbor Nonelective Plus Additional Nonelective

[austin3515]

3% SHNEC to all people eligible for 401(k) plus a 2% regular profit sharing contribution, integrated with SS but at 70% of the TWB. The owner and sole HCE is the only employee over the TWB. He earns $115K, with the TWB at 87K (i.e., integration level is ~61K. For the latter formula, you must have worked 1,000 hours during the Plan year.

According to the ERISA Outline Book, if there are different allocation conditions for two independent design based safe harbor formulas, the design based safe harbor is not valid and rate group testing must be performed.

The ERISA Outline Book goes on to say that if the additional PS contribution passes coverage on its own, then the rate group test will be passed (i.e., there is just one rate group).

When I run the rate group test it fails. The reason being when permitted disparity is imputed to his allocation rate, it assumes the integration level is $87,000. Because the integration level in my example is at 70% it's as though the plan is "super integrated." This results in the owner having a higher allocation rate than everyone else. I already verified that if the integration level was 100% then then his allocation is the same as eveyone elses and the rate group does pass. Am I missing something? OR are the ERISA Outline Book, and Relius both wrong????

What am I missing??? Is there an adjustment to imputing disparity when the integration level is a fraction of the TWB?

[Blinky the 3-eyed Fish]

There is no special adjustment for the general testing when the formula's integration is less than the TWB. That is why it is possible for a safe harbor integrated formula with the integration level below 100% of the TWB to actually fail the general testing. Of course they are safe harbors, so they never need to go there.

Now in your case, the situation you have is one that has been addressed on these boards before. I know I chimed in if that helps to narrow your search.

But basically to summarize past discussions, this type of situation with a SHNEC is very similar to the TH allocation situation. However with TH you are specifically allowed to treat people who only get the TH as not benefiting for coverage in order to maintain the safe harbor formula. With SHNEC that rule is not available, but I truly believe that the law has not properly caught up with the SH provisions. It is logical to be able to apply the same principles to SHNEC as to TH, although technically, there is nothing in the law that allows for this.

[austin3515]

So basically, under this scenario my plan is not in compliance with 401(a)(4)?

[Blinky the 3-eyed Fish]

First, I didn't read your first post carefully before I answered. My answer related to a situation where someone did not receive the PS contribution, but did receive a SHNEC.

But now that I am with you, you are correct that your formula does not have a safe harbor design and must pass general testing. If you fail, then consider an -11(g) amendment to correct the failure and perhaps a formula change to put the integration level at 100% of the twb.

[austin3515]

For not reading carefully enough you are forgiven...

For giving the answer I didn't want to hear, now that is another story altogether...

[jquazza]

I don't understand why you say you would pass at 100% of TWB integration level but not at 70%?

When you do your rate group testing, you can use permitted disparity, whether your integration level is 100% or 20%. The only thing that changes is the maximum disparity % (5.7%, 5.4% or 4.3%) In your case, it looks like it wouldn't matter anyway since you can only apply the permitted disparity on the additional 2% (remember, you're not allowed to apply permitted disparity to the SH contribution) and therefore the max disparity % should be 2% so no problem there. If you calculated your allocation with a 4.3% disparity, that's why you're failing, otherwise, if all the NHCEs make less than 61k+ and at least 70% of NHCEs benefiting at eh 5% rate, you should pass. If no, (document permitting) then can you pass with the ABT? If not, you can try cross testing.

[Blinky the 3-eyed Fish]

I don't understand why you say you would pass at 100% of TWB integration level but not at 70%?

In your second paragraph you acknowledge that you can fail at 70% of the twb integration, yes? 100% will guarantee that you pass on a contributions basis by imputing permitted disparity if you work through the math to prove that fact.

[austin3515]

Here's my math (my example is a 6/30/03 PY):

Owners Wages: 115,000

Integration Level: 87,000*70% = 60,900

SHNEC Contribution for owner: 115,000*.03=3,450

PS Compensation for Owner (w/Integration) = 115,000 + (115,000 - 60,900) = 169,100

PS Contribution for Owner = 169,100*2%=3,382

Impute Disparity on Owners PS:

1) 3,382/(115,000 – 50%*87,000) = 4.73%

2) (3,382 + 5.7%*87,000)/115,000=7.253

Lesser = 4.73

Plus 3% SHNEC, total allocation rate = 7.73% for the owner.

All other NHCE’s (who for simplicity all earn the same amount).

Total Wages: 30,000

Total SHNEC: 900

Total PS: 600

Imputed Disparity:

Allocation rate is 5.7% or less, so 2% x 2 = 4%

Plus 3% SHNEC = 7% allocation rate for NHCE's

Therefore, the Owners rate group will fail because no NHCE’s benefit. I think we all agree that the whole point of imputing disparity to a formula integrated at 100% is to give everyone the same allocation rate, so I won't go through the math on that piece of it.

In this example, it just so happens that the gateway requirements seem to be satisfied so I could use cross testing, but let’s assume that I CANNOT.

I would like to think that the imputing disparity rules are adjusted if the integration levels are less than 100%, but if they are, neither me or Relius seems to be aware???

[Blinky the 3-eyed Fish]

I would like to think that the imputing disparity rules are adjusted if the integration levels are less than 100%, but if they are, neither me or Relius seems to be aware???

Asked and answered. The imputing disparity rules are not based on the plan's formula so why do you think the integration level of the formula should have any impact on the calculation? Or are you calling for a regulatory change?

[austin3515]

Blinky (or should I say Jack McCoy? Don't you have to object first?), I agree with you, but it seems that there should be a special exception carved for this situation--i.e., it's a safe harbor formula to integrate at less than 100% of the TWB, so there should be a way to get imputing disparity to equalize everyone's rates if the integration level is less than 100%. But the point is moot because there is no such exception that I am aware of...

[Blinky the 3-eyed Fish]

The solution is for you to run for Congress, get on a committee and pursuade your fellow legislators to enact changes to this perceived injustice. But you better get cracking or your crusade will be delayed for 2 years. Your slogan:

Pensions for All! Yeah Baby!

[austin3515]

Smashing...

[austin3515]

Just put a call into Corbel for support. I'll let ya know what they say.

[Tom Poje]

why not just read 1.401(a)(4)-7 which describes in detail how to impute disparity.

in particular paragraph (b)...

if the plan took into account full disparity and used the TWB as the integration level.....this is used to determine if plan...satisfies the general test....and average benefits percentage test...

there are no exceptions.

at the same time, why not argue that you should be able to use 6.2% rather than 5.7% since that would reflect the actual Social Security percentage that is taken out from a paycheck.

[austin3515]

http://www.ssa.gov/pubs/10035.html

The link above indicates that 85% of the payroll taxes are allocated to OA insurance and 15% to Disability insurance (i.e, 6.2 x .85 = 5.27% = OA insurance). 401(l)(2)(A)(ii)(II) clearly states that it should be the rate attributable old age insurance, or 5.7% whichever is greater. How can we use the 6.2%?

[Tom Poje]

you can't. the original regulation would have increased the % as soc sec went up. in fact, in 1988 it went from 5.7 to 6.05, but in 1989 it was set back (somewhat permanently) at 5.7.

no, I don't recall running a plan at the 6.05%, I am looking at a table showing the %s.

[austin3515]

To clarify then, this plan design does not work and will never work?

Isn't it a little scary that a nonstandardized prototype could so easily violate the design based safe harbor requirements? There must be a ton of plans out there with the same problem, no?

Thanks Tom, as always!

[Blinky the 3-eyed Fish]

To clarify then, this plan design does not work and will never work?

It's not a safe harbor, but that doesn't mean it doesn't "work".

[austin3515]

I thought we "proved" that it will never work? Whoever has the highest comp will be in a rate group all on their own, that rate group will have the highest allocation rate, and no NHCE's will be in there, because none of them earn more than the TWB (okay maybe a few do). So therefore, the rate group will never pass (absent cross-testing, assuming gateway is satisfied).

[Blinky the 3-eyed Fish]

First, never say never. Second, the person with the highest comp could be an NHCE. Third, I didn't say absent cross-testing. Fourth, purple monkey dishwasher.

[austin3515]

But don't you think that this has to be a common oversight? Isn't it troublesome that a prototype can have such a treacherous 401(a)(4) pitfall?

[Blinky the 3-eyed Fish]

Yes, it keeps me up at night.

But seriously, I agree, but that is why it is important to know the rules, otherwise many aspects of plan administration can be treacherous, like the jagged cliffs of Acapulco.

[austin3515]

You have a way with words... Purple Monkey Dishwasher????

[Blinky the 3-eyed Fish]

There is some that will get that line, while others will not. The first to respond correctly to the meaning of the reference wins nothing.

[austin3515]

Somethign with the game "telephone," right? Is that how you get them to repeat whet they said???

This thread is falling apart...