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PS Allocations and Otherwise Excludables


CuseFan

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Background: I have a relatively young doctor who has one older >1000 hours employee, another older <1000 hours employee, and two younger <1000 hours employees.  Already has max 401(k) elsewhere (no CG, ASG or 415 aggregation concerns), so looking at doing PS only and getting $56k max. Including all and cross-testing doesn't work well because only one of the two younger employees are substantially younger than the owner.  The one >1000 hours employee is fairly low paid, so an integrated formula at the lowest threshold, excluding the <1000 hours people, works very well. HOWEVER - and hold onto your hats because how many times have you seen this with a doctor - he wants to include everyone. In that scenario, whether integrated or cross-tested, the contribution rate required for employees is substantial, not an issue with one low paid employee but a different story including everyone.

Questions: I know I can include in the Plan and essentially carve out from testing the <1000 hours people as otherwise excludable employees, but can I have the integrated formula for the >1000 hours people and something else, TH minimum or greater, for the <1000 hours people? If the only way to do (or mimic) this is individual rate groups and testing on contributions with permitted disparity, must I use the SSWB? I assume I cannot arbitrarily pick something lower even if allowed formulaic if designed that way, but wanted to confirm. 

Any other thoughts are appreciated.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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2 hours ago, CuseFan said:

testing on contributions with permitted disparity, must I use the SSWB?

I found this answer - yes - and it looks like my document will not allow an integrated formula for non-excludables and something different for otherwise excludables. I could probably exclude the <1000 hour people from PS but add a 401(k) provision with immediate entry for current employees and then they are entitled to 3% top heavy. Any other suggestions?

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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My understanding is that if you are allocating to individual groups and testing using permitted disparity on allocation rates, the integration level for testing must be 100% of the TWB.

Option C is to adopt two separate plans with different allocation formulas for the two groups of employees.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Thanks people. New comp/cross-testing doesn't work well with the demographics. Two separate plans to cover 5 people isn't cost effective. Who would have thought it'd so difficult for a doctor to provide benefits for employees which he doesn't have to provide! Maybe just giving the <1000 people a bonus they can put in an IRA if desired will be sufficient for him. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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7 hours ago, CuseFan said:

Background: I have a relatively young doctor who has one older >1000 hours employee, another older <1000 hours employee, and two younger <1000 hours employees.  Already has max 401(k) elsewhere (no CG, ASG or 415 aggregation concerns), so looking at doing PS only and getting $56k max. Including all and cross-testing doesn't work well because only one of the two younger employees are substantially younger than the owner.  The one >1000 hours employee is fairly low paid, so an integrated formula at the lowest threshold, excluding the <1000 hours people, works very well. HOWEVER - and hold onto your hats because how many times have you seen this with a doctor - he wants to include everyone. In that scenario, whether integrated or cross-tested, the contribution rate required for employees is substantial, not an issue with one low paid employee but a different story including everyone.

Questions: I know I can include in the Plan and essentially carve out from testing the <1000 hours people as otherwise excludable employees, but can I have the integrated formula for the >1000 hours people and something else, TH minimum or greater, for the <1000 hours people? If the only way to do (or mimic) this is individual rate groups and testing on contributions with permitted disparity, must I use the SSWB? I assume I cannot arbitrarily pick something lower even if allowed formulaic if designed that way, but wanted to confirm. 

Any other thoughts are appreciated.

Yes, you can have the integrated formula for the over 1000 hours people.  You will have the appropriate eligibility provision to bring in the under 1000 hour people and, as you noted, they are tested separately.  Now, let's assume the plan document will provide the under 1000 hours folk a zero benefit.  No problem. After the year is over, ask him how much he wants to give each of those under 1000 hour folk and do a -11g amendment to make that happen.  By definition, that amendment will be non-discriminatory.

Of course, you have not given us all the needed data to really answer the question because we don't know how much the compensations are of the under 1000 hour folk and how much he wants to give them.  As noted in a prior answer, if the amount he wants to give them is less than the IRA max, just give them a bonus to fund their IRA and we don't have to go through all the complications I introduced in my first paragraph of this response.

Larry.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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