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Owner's Kid Shortchanged


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A small employer sponsors a PSP that allocates contributions on a comp-to-comp basis - everyone gets the same percentage of pay.  There are 2 HCEs (owner and daughter) and 1 NHCE.  The owner would like to allocate 25% to both herself and her long-time NHCE.  However, since she only has a specific amount to contribute, her daughter would be left getting only 15% of pay - which is OK with the owner, as the daughter just entered the plan and will not be staying long.  Having the daughter waive participation is not an option - the owner wants her to get the remaining allocation.  How much of an issue do you think this would be if the plan were audited since it's the owner's kid who was shortchanged?  Would they likely assess penalties for not following the terms of the document even though no NHCEs were affected? 

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As the plan is written you can't do it.   You have to follow the terms of the plan.   It seems like you could amend the plan to put everyone into their own allocation group and see if the tests pass.  It would seem they would pass as it is one of the HCEs getting shorted.

 

I agree with Mike 100% can't be done as described but someone should be able to get the document to a place that allows the plan to meet the client's goals.  

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Mike and ESOP Guy are correct of course. They must follow the terms of the plan document as written.

The best way to get them where they want to be, assuming we are talking about 2020, is to make no contribution under the plan (assuming the amount is completely discretionary) and adopt a new plan retroactive to 1/1/2020 with an individual groups (a.k.a. "new comp") allocation formula. They can then merge the original plan into the new one later on so they are not stuck maintaining two plans forever.

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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Is the employer contribution subject to a vesting schedule? Assuming the contribution is allocated correctly - in proportion to compensation - how much would the daughter actually get to keep when vesting is applied? If there are forfeitures, the forf amounts might be available next year, depending on the document provisions. 

Edit: Assuming the daughter is terminated and is taking a distribution of course. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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6 minutes ago, Lucky32 said:

A cross-testing design will not work - the nhce is significantly older than the owner.  Also, the employer is an s-corp and the owner's W-2 is similar to the nhce's.

You still need a plan with individual groups in order to vary the contribution by person.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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2 hours ago, Lucky32 said:

A cross-testing design will not work - the nhce is significantly older than the owner.  Also, the employer is an s-corp and the owner's W-2 is similar to the nhce's.

Just because the plan document says new comp does not mean you have to cross-test. The allocation you're describing would pass the general test on allocation rates but you can't do it if your plan document doesn't allow allocations by individual groups.

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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2 hours ago, Lucky32 said:

A cross-testing design will not work - the nhce is significantly older than the owner.  Also, the employer is an s-corp and the owner's W-2 is similar to the nhce's.

If you cross test on a contribution basis  it will pass easily with HCE 15%, HCE 25% and NHCE 25%. But as others have said you need a document that allows for varing rates of contribution and you currently don't have one.

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How about an -11g amendment to allocate the additional 10% to HCE 1 and the NHCE on top of a nominal stated contribution of 15% to everyone?  Plan doesn't have to fail to do an -11g.  The new benefits would be nondiscriminatory.

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8 hours ago, Bri said:

How about an -11g amendment to allocate the additional 10% to HCE 1 and the NHCE on top of a nominal stated contribution of 15% to everyone?  Plan doesn't have to fail to do an -11g.  The new benefits would be nondiscriminatory.

Conventional approach leads to deduction of -11g amendment contributions in year of adoption. 

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On 3/12/2021 at 1:44 PM, Lou S. said:

If you cross test on a contribution basis  it will pass easily with HCE 15%, HCE 25% and NHCE 25%. But as others have said you need a document that allows for varing rates of contribution and you currently don't have one.

Point of order, your honor. The phrase "cross test on a contribution basis" is, at best, a Norm Crosby delight (malaprop) and, at worst, a description that should be discouraged with a random number of lashes.  

Try "test for non-discrimination on a contributions basis" instead. You'll like it.  And I won't hear fingernails on a chalkboard in my head as I read.

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