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3% to all but HCE


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Employer wants to give 3% PS contribution to everyone in the plan - except the owner does not want to take a contribution at all.  Owner has a son who happens to be youngest employee in plan and giving his son 3% will not pass rate group testing.  He fails.

- Can you still give son 3% and just say that the allocation in pro-rata other than the owner is taking $0.00

or 

Becuae owner is taking $0.00 do you lose the pro-rata design and have to test the plan and thus limit the son to a smaller than 3% contribuiton to get plan to pass testing.

  

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If the plan permits you to give everyone except the owner 3% then you are fine.  

Saying that it is a pro-rata allocation except you are excluding the owner is a shortcut way of describing what is actually happening, which is - you are deciding to independently give each person 3%, except for the owner.  You then general test on the basis of current contributions and no HCE is getting more than any NHCE on a percentage basis so you will pass the test.

Of course the plan has to have each person in their own group or at least have the owner in a separate group in order to not give the owner a contribution.

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This raises an issue I've been thinking about recently, and I feel like I may be missing something very basic by never being heavily involved in the allocation/testing process.

Can you put everyone in their own group for allocation purposes, then do a general rate group test based on contributions (not benefits)? My perception is that, as soon as everyone is put in their own group, most people automatically go straight to cross-testing. Our Relius documents do not connect the two; they allow an allocation method based on every participant in their own group separate from cross-testing. The only other option seems to be general testing.

Assuming for the moment no other HCEs, it seems like the above situation would pass general testing based on a 3% allocation to 100% of non-HCEs but only 50% of HCEs. The age of the owner's son would be irrelevant.

Is this a valid option?

Also, 1.401(a)(4)-2(b)(4)(v) seems to allow the plan to retain a safe-harbor allocation even if one or more HCEs receives a lower allocation than the "normal" allocation. 

 

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1 minute ago, EBECatty said:

Can you put everyone in their own group for allocation purposes, then do a general rate group test based on contributions (not benefits)?

Yes, YES, YES!  Not only does it make cases such as the one posed easy to handle, but we've had MD groups - anesthesia in particular, where the owners tend to be young - where cross-testing doesn't work.  But we can max the owners, and give other HCEs (e.g. CRNAs or non-owner MDs) 3%, and give a staff member or two 13% or whatever, and all is good.  I call it "Ageless" testing but haven't seen that term stick anywhere.

 

5 minutes ago, EBECatty said:

Also, 1.401(a)(4)-2(b)(4)(v) seems to allow the plan to retain a safe-harbor allocation even if one or more HCEs receives a lower allocation than the "normal" allocation. 

I have to be honest and say I don't know what that means.  I think it means that if an HCE gets less or nothing due to some formulaic application (maybe where the limitation is hard-coded) then it will be ok.  It does NOT mean that you can take a pro-rata formula and arbitrarily say "but we're not including the owner."  

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Thanks. It does seem much easier in situations like this. Just wanted to make sure I wasn't missing a piece of puzzle.

I'm honestly not sure the "HCE gets less" rule applies here either, but thought I'd throw it out there. The regulation is not very clear, but does not seem to require a specific plan provision resulting in the lower HCE allocation. Doesn't matter either way for present purposes.

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10 minutes ago, BG5150 said:

Catty, is the plan set up as everyone in their own group or design based safe harbor via pro rata allocation?

Not sure if this is asking about the original question (which was not mine) or my hypothetical, but in my hypothetical the plan would be designed with everyone in their own group for allocation purposes.

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How about if the plan is top heavy and the top heavy provisions in the plan do not exclude non-key? Grouping or not, unless categorically excluded, both the owner and the son gets 3% (assuming that they are both key). Of course, the contribution basis testing is a given.

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59 minutes ago, Jakyasar said:

How about if the plan is top heavy and the top heavy provisions in the plan do not exclude non-key? Grouping or not, unless categorically excluded, both the owner and the son gets 3% (assuming that they are both key). Of course, the contribution basis testing is a given.

I don't understand your question. Did you mean to say "do not"?

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