Safe Harbor & New Comparability P/S Plan

[Guest Jim Jesikiewicz]

What items should I be cautioned with when creating a Safe-Harbor Match plan with a P/S New Comp Plan for our company?

I understand the "free ride" for testing with the safe harbor plan but I am more concerned with the P/S plan beneifiting the HCE level group by no more than 1/3 of the lowest NHCE.

e.g. Group 1 = 6%

Group 2 = 4%

Group 3 = 2%

I am trying to arrive at the owners of the company (Group 1) get most of the "extra" P/S money, if any, at year end.

I understand the guarantee of the 4% total match is close to being the minimum getway allocation of 5% thus just move the entire plan to new comp. Also, it is a small number of employees (10) and I think all would participate and think about the 3% non-elective. At least this way the only guarantee from the employer would be a minimum 3%.

What am I missing with structuring a plan of this type? Am I going about creating this properly?

Thank you for your input.

[Tom Poje]

If I undersatnd you correctly, you currently have a safe harbor 401-k with the basic match.

you are suggesting that in 2002 the plan switch to the 3% nonelective.

this could give

group 1 9%

group 2 ??

group 3 3%

this would pass the 1/3 test

so now if you can pass nondiscrim testing you are ok. you can not impute disparity on the testing since it wouldn't help.

since 1.085^13 = 2.89, then you must have at least a few NHCEs who are 13 years younger than the HCE to pass the test.

[Guest Jim Jesikiewicz]

I currently have a safe-harbor match for 2001.

We want to distribute additional company cash (e.g. P/S) with the majority going to the owners for 2001.

Can I add the New Comp P/S plan to what we already have.

[Tom Poje]

Jim:

If plan has a last day provision for profit sharing allocation, you could amend to a class formula as you desire.

That is because no one has 'earned' a contribution for the year, and so there would be no cut back.

If the profit sharing feature in the plan requires 1000 hours, then it is to late in the game to change that. (or I suppose, if 0 hours for death, and someone actually died, then again you are stuck since that person has already earned his right to a contribution)

But yes, you can always contribute additional money to a safe harbor plan. in 2002 any additional amount would eliminate the free ride on top heavy, but that doesn't sound like a big concern here anyway.

in your case, assuming 1 owner at $170,000 in comp and max deferral....

deferral $10,500

4% match 6,800

ps (desired) 17,700 which is 10.412% of pay

note: the 1/3 rule does not take effect until 2002, so you do not need to worry about it this year. looks like in this plan the ps contribution to rank and file would be around 3 to 3.5% in the future.(providing you still pass testing)