Possible to have no HCEs?

[Guest Effie Clark]

I have a profit sharing plan that currently has an integrated formula. The client wants to amend to a cross test however, there are no employees working for the company that are HCEs. The one possible person is an officer who makes under $70,000. Is is possible to have a cross test formula when there is no way to perform 401(a)(4) testing?

I have already discussed this with the people in my office and they say it's ok but I'm still not comfortable giving the officer 25%, a second tier 10% and everyone else 3%. I don't even really have to do the 3% since the plan is not top heavy.

:confused:

[david rigby]

The issue of "officer" is not relevant to determination of HCE status. Only the compensation test and the 5% owner test. Officer might be relevant to the determination of Key EE for top heavy determination.

In general, if a plan has no HCEs, then issues of discrimination testing evaporate. However, there could be an issue if this group is part of a controlled group.

[Guest merlin]

Even though there are no HCEs you still may have an anti-cutback issue. If any participant has already met the requirements to get an allocation on the integrated basis, that has to be guaranteed. If the plan has a last day requirement you're OK-I'm assuming you're still within the plan year-otherwise you may have to wait until next year to make the change.

[Guest Effie Clark]

Yes, the plan's formula was integrated and in the past they have always deposited 10% - 15% of eligible compensation. Everyone who ends up in that third class is really going to be hit hard with a reduction in their contribution amount.

Just doesn't seem fair to me that a company can do this when there is no HCE to require the calculation of the 401(a)(4) test.

[david rigby]

You may have a point, but "fairness" is an issue that is defined in the relevant statutes and regulations by comparing benefits and/or contributions between two groups: either compare Key EEs versus NonKey EEs, or compare HCEs versus NHCEs. Although it may be an oversimplification to say this, there is no prohibition in federal law and regs against "discrimination" within the HCE group or the NHCE group, as long as it does not violate other statutes (such as ADEA).

[MWeddell]

This was foreseeable when Congress simplified the definition of highly compensated employee effective in 1997. Occasionally there'll arise a situation like you've got when it feels discriminatory without violating any testing rule but that's what happens when Congress simplified the definition of highly compensated to eliminate things like the lower dollar amount threshold for officers or the rule that every employer must have at least 1 HCE.

[Guest merlin]

In your particular case I would say that fairness consists of not taking away anything that has already been earned,hence my comment above about the application of the anti-cutback rule.Apropos of pax's comments,there is a story about Justice Oliver Wendell Holmes. He was walking to work with a friend one day. As Holmes left his friend to enter the Supreme Court building his friend said "Goodbye,do justice". Supposedly Holmes replied "That's not my job.My job is to play according to the rules."Probably not true,but you get the point. Besides,in our business we're usually dealing with the Tresury Department.Justice is someplace else.