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Cash Balance / Profit Sharing Plans Rate Group Testing


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Just needed to confirm something for testing purposes.  Owner has a son that makes $50k and contributes the max into the 401(k).  It's currently a Safe Harbor Plan, so there's no testing issues (they also make an additional Profit Sharing)

They are considering adding a Cash Balance Plan to further maximize the contributions for the owner.  If I were to exclude the owner's children from the Cash Balance, do I still have to include them into the testing for the offset? (obviously the son's EBAR is astronomical, since he's only in his 30s, so including him makes passing the test impossible).

If he's excluded from the Cash Balance, he can also still get the same Profit Sharing he would've gotten, correct?

Thanks in advance!

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  • Stash026 changed the title to Cash Balance / Profit Sharing Plans Rate Group Testing
21 minutes ago, Stash026 said:

do I still have to include them into the testing for the offset?

What does this mean? Are you doing a floor-offset plan?

Yes, the owner's son has to be included in the general test, even if he gets no accrual in the cash balance plan. Consider amending the 401(k) plan to not provide the safe harbor non-elective contribution to HCEs, then he won't receive an allocation at all and his EBAR will be 0. Also see if you can use component testing to put him in a rate group tested on allocation rates, preferably with some older NHCEs whose EBARs aren't helping the owner.

26 minutes ago, Stash026 said:

If he's excluded from the Cash Balance, he can also still get the same Profit Sharing he would've gotten, correct?

It's possible, if you can use component testing, but not guaranteed. If the plan will be exempt from PBGC coverage then their profit sharing contribution will probably be smaller than they are used to due to the combined deduction limit.

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Are the 401(k) contributions excluded from the testing?  I got a file from another TPA on a different client that includes EBAR for the Deferrals, Profit Sharing and Cash Balance contributions in the rate group testing for the off-set plan.

Is that not accurate?

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6 hours ago, shERPA said:

A younger family member making a high percentage 401(k) deferral often blows up the average benefit percentage test.  

I have a couple of these... but fortunately the rate groups passed on 70% so didn't need the ABPT.  (hmm... so many options...)

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