Excluding highly compensated employee who is not an owner from a plan

[rblum50]

I have a client (100% owner) who maintains both a 40(k) plan and a defined benefit plan. He will be having an associate age 59 joining the company later on this year earning >300,000 with no ownership in the company. The owner (age 49) wants to minimize the amount the company would have to put in either plan for this associate. Here are a couple of alternatives:

1) As a highly compensated employee, exclude him from both plans.

2) Exclude him from the DB plan. Include him in the 401(k) (comparability plan). The plan currently allows for a discretionary contribution, salary deferrals  and a Safe Harbor match. We can zero out his discretionary contribution, preclude him (agreement outside the plan) from making any salary deferrals which, in turn, would negate any safe harbor match. 

Let's us assume that in both cases discrimination requirements are met. Then In both cases, there would be no employer contributions for him.  Comments.

[Bill Presson]

Couple of thoughts:

1. He won't be an HCE until later in his employment (not sure of his pay in 2022).

2. If he's eligible, he has to get a top heavy minimum (I would assume).

[Bri]

Are there other employees for 401(a)(26) purposes, or has it always been just the owner?

[rblum50]

Given the eligibility requirements, he won't start participation until January 2024. Yes, there are about a dozen other employees, none highly compensated except owners wife.

[Bri]

I think they'd just be on the hook for a THM, then.  Whether that's 3 or 5 depends on whether he's in an excluded class of employees, versus just being a participant with a 0% benefit formula on the DB side.  If you make him completely ineligible from the DC plan, too, then you owe him nothing, and he still counts in the tests as a zero.

[CuseFan]

18 hours ago, Bri said:

If you make him completely ineligible from the DC plan, too, then you owe him nothing, and he still counts in the tests as a zero

Agree this is best (only?) way to accomplish owner's objective. Otherwise, potential THM as Bri notes. Why make eligible for DC and then try a (highly) legally questionable side agreement precluding him from making deferrals? Employee can make an irrevocable election not to participate prior to entry if plan language allows but why? Just amend plans to exclude him. This also makes it easier to later bring him into one or both plans if circumstances change.

[Peter Gulia]

Alternatively, an employer and a would-be employee might negotiate the employee’s compensation based on the employer’s all-in expenses, adjusting the salary so the employer’s expenses, including for health and retirement benefits, meet what the employer is willing to spend to get the employee (and what makes the employee willing to work for the employer).

Even if exclusions from one or more employee-benefit plans might be feasible, consider whether the employee might value some kinds of health or retirement benefits enough that she’s willing to accept a lower salary so the employer meets its all-in budget.

[david rigby]

1 hour ago, Peter Gulia said:

Even if exclusions from one or more employee-benefit plans might be feasible, consider whether the employee might value some kinds of health or retirement benefits enough that she’s willing to accept a lower salary so the employer meets its all-in budget.

Ding, ding, ding!