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Need tips on how to break down nonelective contributions to do compone


Guest Phil L.
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Guest Phil L.

I have a plan that requires 401(a)(4) testing. The plan has a pro-rata allocation formula. The first $3,500 of each participant's profit sharing contribution is fully vested and used in the ADP test. The remainder is just a regular old run of the mill nonelective contribution.

The regular nonelective conrtibution (excluding the piece used in the ADP test) fails all six of the (a)(4) tests. I can get a little closer to passing by using taxable wages instead of gross wages for testing purposes. However, I am wondering if anyone has any hints or tips on how to break the plan into component plans for (a)(4) testing. I think component plan testing is my last chance to get the plan to pass.

Any thoughts, ideas, comments, on how to break the plan into component plans will be greatly appreciated.

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1. what was used for age definition? If you are close, that is sometimes enough to make a difference.

2. put in corrective amendment to alloacte contribution to one or two selected ees in order to pass test.

w/o other info, I wouldn't even hazard a guess at component testing. (e.g. number of hces vs nhces that you are talking about.)

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Component testing is done by breaking the groups into component groups that can separately satisfy 410(B) and 401(a)(4). You might then test one group with an old HCE on a benefits basis and a group with a young HCE on a contributions basis. This sometimes works, for example, when there are two owners, a father and son or daughter.

One issue I'm not certain of is if each component group must satisfy the 70% ratio percentage test if the groups are arbitrary, i.e. is the average benefits test unavailable because the groupings are not a "reasonable classification".

Can anyone experienced in this clarify this for me? Does each component need a ratio percentage of at least 70%?

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You're right. You can "cherry-pick" your component plans as long as each component plan passes the ratio percentage test. If you need the Average Benefit Test you must have reasonble classes of employees. Also remember two other things:

- Each employee can only be used in one component

plan.

- Each component plan will be deemed to satify the

Average Benefit Percentage Test only if the plan

as a whole satsfies theABPT.

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