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You might also want to check the plan's QNEC provisions to see if an ADP or ACP testing failure is required before a QNEC can be made.  Our VS document does not require a testing failure.  You might be able to use a QNEC to get additional contributions in the TH test without increasing the balances of the Keys.

 

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@Kevin C

Thanks!  That's a great idea too. The only drawback I see to that is that the money would be 100% vested immediately where the PS money wouldn't, but that might not matter.....

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@ Tom Poje and Kevin C:

Thank you both for suggesting the extra profit sharing contribution to tip the scales in favor of the NHCEs to bring the percentages to just under Top Heavy.  For the prospect, we have made the suggestion and explained how it works.  To be seen whether they will follow the advice and whether we will eventually have them as a client.  This was an interesting case.  Once we finally got our hands on enough data to know the situation, it turned out that the Key balances as adjusted for distributions came to only 60.13% of the total.  A contribution of only .058% of pay as a profit sharing contribution would drive them back down to 59.99% for the Keys.  This is far less than the cost of a 3% SHNE or even a basic Safe Harbor match (for 2019) and could work for them for a few years. 

This technique also worked beautifully for a 03/31/2018 plan I just finished.  We will go explain the concept to the client and see if she wants to go for the very small profit sharing contribution it would take to tip their plan back under the Top Heavy limit.  Their Key balances are only 60.04%!  It won't take much money at all to fix their situation.  It's embarrassingly simple once we know it, but we never thought of it on our own.

If Tom Poje had not recognized that I didn't "get it" at first and hadn't persisted, this wouldn't all have turned out this way - you are a great teacher whether it's in person at the annual ASPPA convention or online!  Much appreciated!

 

 

 

 

 

 

 

 

 

 

 

 

 

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I'm not sure I would go so far as to say you 'didn't get it', once you indicated the 'key' compensation was small, that offered potential and a simple example to illustrate.

but appreciate the comments, maybe more than you would realize. (for some deeply personal reasons not worth going into I no longer attend ASPPA, but at least here I can still share) guess a 'few' years of experience and a hopelessly mathematical mind for tinkering with numbers paid off.

 

 

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@Tom Poje  it has been a few years, I guess.  I just remembered that you taught some classes I saw there and that you were really good.  But I have been going to the annual convention off and on for about 24 years so I am not sure what year(s) those were.  I am not going presently just because I now live and work really far away from DC and it has gotten prohibitively expensive for very small shops to send people.  In past years, when it was still at the Hilton and I lived in MD, it was feasible for my employers, but not now.  So I watch a lot of John Hancock webinars!

Have a great day!  :)

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All great suggestions made previously.

Many years ago, we would contribute a per diem discretionary contribution, say $50 each,to the lowest or lowest several pay grades at a given company and helped several companies work out of this problem. A typical lowest pay grade might be the custodial staff, the receptionists, and entry-level assistants.

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C.B.Z,

That is a very creative solution for those age 50 or more.  Kudos

Editorially, for a company that is not rolling in the green stuff,  it might be better for Keys to skip the deferrals and pay taxes at the lower current tax rates. Then invest in capital appreciation instruments and pay capital gains taxes in the future. Also, maybe just get rid of the 401(k) plan. The government considers an employer to be a potential public enemy when it sponsors a plan. Steer employees to IRAs. Give bonuses to the ones who excel, and focus on the business.

 

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All great suggestions made previously.

Many years ago, we would contribute a per diem discretionary contribution, say $50 each,to the lowest or lowest several pay grades at a given company and helped several companies work out of this problem. A typical lowest pay grade might be the custodial staff, the receptionists, and entry-level assistants.

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Great thoughts-agreed, depends on the employer.

In the mid-90s we had a foreign parent (who almost never understands this stuff)--and for about $5k in QNECs we helped them to pass the test---the only issue is if the lowest pay grades are paying attention, they might say "Where are these pennies from heaven coming from and why ?" But no one ever complains. 

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  • 2 weeks later...

@Tom Poje  Update:  the prospect opted to go with your solution!  Thank you again for a great idea.

As a side note, someone involved with this plan objected vehemently and insisted that accruals do NOT belong in the Top Heavy test and that this methodology is flatly wrong.   If that was true, then there would be thousands upon thousands of plans whose Top Heavy tests are not being done correctly, because every TPA firm I have worked for in the last 40 years has included the accruals in the participants' balances when the Top Heavy test was run.  Our software provider has as many years of experience as I do and she also said all of her clients, to her knowledge,  include the accruals.  She told me how to exclude them if I wanted to do it - enter the accruals as a separate investment item and carve them out of the test - but why, when nobody does this, was her point. 

Thanks to everyone who wrote in.  All's well that ends well!

 

 

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of course just because one IRS individual voiced an opinion you could include them doesn't necessarily reflect an actual Treasury position, though the Q and As generally were submitted beforehand and so the answers aren't simply off the cuff. it is odd how you would include accruals in just about everything (nondiscrim testing) and optional for 70 1/2. and at least one can point to the Q and A as a starting point...

I thought whoever posed the question put forth a valid argument / description as reason for including such amounts. on the other hand it is hard to unlearn something you have been taught "Never ever ever ever include accruals except year one in a profit sharing plan

I could see not including missed deferrals and make up contributions, etc made under EPCRS (e.g they don't make you go back and rerun the ADP test)

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