Defining Rate Groups

[Guest Joe Vasko]

If you satisfy the 5% Minimum Contribution Gateway, can you define your groups in any fashion you want? I have a Plan with 2 HCs and 2 NHCs, but the HCs compensations vary and would justify putting them into seperate groups in order to maximize their benefit.

Thanks,

Joe

[Tom Poje]

You can define your groups in any manner you want, but just because you provide the gateway, it means nothing.

In other words, before you even get to the land of cross testing, you have to 'buy a ticket' to get in past the entrance (or gateway).

It will cost you - in most cases, 5%. Ok, now you have entered the park, now start running your cross testing.

[Guest Joe Vasko]

Tom,

I do relize that the gateway is just the beginning of the cross testing process, however, my concern was the way the rate groups were defined.

On another note, in rate group testing, do you have to include all money sources in the test (deferrals, 3% Safe Harbor, Profit Sharing). Or can you pass the test just using the safe harbor and profit sharing contributions.

Thank you for your previous response.

Joe

[Tom Poje]

Joe:

we actually work on one plan that has about 10 groups. each doctor wanted his own thing.

as far as testing goes and which contributions to use, you have to be careful about which test you are talking about. It is a yes and no answer.

the average benefits % test includes everything.

the rate group test would only consist of the nonelective contributions - e.g. the safe harbor and profit sharing (including forfeitures). you are allowed to impute disparity on the profit sharing and forfeitures, but not the safe harbor.

[Guest Joe Vasko]

Tom:

For cross testing, I assume you only need to pass the rate group test (does not include deferrals). Are you still required to perform the average benefits % test, if you pass the rate group test?

Thanks,

Joe

[Guest merlin]

If you have 70% coverage for each rate group you're done. If not then you need the Avg. Ben. test

[Tom Poje]

Given the nature of the beast, it is very rare that each HCE will pass the ratio percentage test on his/her own. (Though with the 5% minimum gateway it might be a little ore common)

gosh, just for kicks(I know you don't have to), try running a safe harbor integrated plan using accrual rates for testing purposes. you will probably fail -

that is why it is important to be aware of the avg ben % test.

plus, when you use the term rate group test, I have no idea exactly which test you are referring to. did you mean the ratio % test on each individual or did you mean the nondiscrimination classification test in which the ratio % test has to be greater than the midpoint?

[Guest bobark]

How free form is setting rate groups?

For example, suppose 5% owners was to be one rate group, other HCE a second, NHC over age 45 a third, and all others a fourth group.

Is that OK?

The concern here is trying to get an age weighted plan switched to a cross test with due regard to 411(d)(6). The over age 45 NHC would get "grandfathered".(All others do better under the 5% gateway)

Is it possible/necessary to have the 2001 year include the extra layer on the NHC ( This is TH plan - does not have active/year end) and next year eliminate the over age 45 group.

Or am I in a vicious cycle whereby I can't get any 2001 contribution to be allocated any other way than age weighted?

[Tom Poje]

If ees have already accrued a benefit (e.g. no last day provision in the plan) then it is too late this year because I am sure everyone has met the hours requirement.

Soe argue that since profit sharing is discretionary, you should be able to change the forula, but the IRS tends to take a dim view of that argument.

As for groups, you can pretty much do what you want. We have one plan in which each doctor is named in his/her own group as well as a group of rank and file.

you have to be extremely careful about a group named 'owners'

it is best to have it 'owners not by attribution', otherwise the owners kid gets hired and then you can never pass testing.

[AndyH]

You can use any criteria you wish for the allocations, including individual names if you wish.

You should be careful about running afoul of side issues such as age discrimination or the like, however. Many people would not use age or date of birth due to potential age discrimination risks under ADEA. For similar reasons, I would not have one group be all men and the other be all women.

But, if you want to group by hair color, you probably could do that.

[Guest bobark]

Thanks, Tom

In our case it is several younger attorneys with smaller ownership but high pay who do not want $35,000 - but the two principal owners - one of whom is young - wants to max out.

If we adopt a brand new cross test plan and don't fund the age-weighted this year, any flexibility there?

In other words,

2001 - 2 plans - fund the cross test

2002 - merge the plans

Fully vesting the age weighted plan would be something to try to avoid ( complete cessation and all that) but it would not be a huge issue for them.

If that is too aggressive, I guess we could put in the cross tested plan with a 2001 formula that only gave the one attorney an additional substantial contribution and gave everyone else 2%.

Effect would be 5% for most in two plans combined, $35000 for 2 attys, and 7% to 9% for three older not highly.

[Tom Poje]

I read somewhere one could put in a new plan, make a zero contribution to the original plan and go cross tested in the new plan. Somehow that seems to be more expensive and trouble than its worth.

you can get into an odd situation when you have lots of hces, but not all of the receiving a large contribution. sometimes a young HCE can get a large contribution as a result.

good luck on whatever you do.