Cross-Tested Plan with no highly compensated employees

[Guest John Sample]

A not for profit company wants to amend their DC plan to use a cross tested allocation formula. There are no Highly Compensated or Key employees, and there will never be any.

In the most extreme example, if they have 40 employees, could they have 40 rate groups with different contributions for each group? Essentially, giving a different contribution amount to every plan participant?

[david rigby]

The entire issue of non-discrimination testing is focused on HCEs vs. NHCEs. If there are no HCEs, then there is no discrimination.

[RCK]

It is OK discriminate among the NHCE's or among the HCE's, and in fact you can discriminate against the HCE's. But as pax says you can't discriminate in favor of the HCE's.

The greater issue in your case is going to be a communications and HR issue--how you deal with the differences in the Summary Plan Description, and other employee communications that deal with the benefits. (For the record, I have always viewed the SPD as a legal requirement, and not a communications tool).

RCK

[Guest John Sample]

Thank you for the comments. That is what I thought, it just doesn't seem right.

The Company does not want to give different contributions to every employee, but they do want to have different rate groups with varying contribution amounts.

I agree that they will have a hard time communicating the plan to participants. Even though there are no HCE's, the employees will be disappointed being in different "classes" with different contribution amounts.

[actuarysmith]

I cannot site chapter and verse, but I recall reading somewhere that if your allocation groups had the effect of placing too many participants in categories where they were the only benefitiing at the level, that the arrangement could be deemed to be a CODA.

This would mean that the contribution limit would be $10,500 for 2001, rahter than $35,000 or 25% of pay. (This may not be a problem in a non-profit organization - at their income levels they probably would not want/get a benefit any larger anyway).

As far as testing is concerned, without any HCE's you can do whatever you please. (Within the confines of 404 and 415).

Caution - If someone appears to be approaching the HCE compensation limit in the future, you may want to have them hold back the actual W2 compensation and neogotiate with the employer to give them a larger benefit under the plan. This way it will prevent them from becoming an HCE and spoiling all your fun.

[david rigby]

If the desire to provide different benefit levels can be defined by location, division, etc. then that might help with some communication issues.

If you are trying to "steer" a higher allocation to older employees, then you might want to investigate a target plan.