Corrective Contributions

[Guest LWilson]

I am new to New Comparability Plans . . . I'm running 2002 projections for a client who is interested in a New Comparability design. We have a large population of owners, several of whom are young, which means to maximize their contribution I'm going to have to do something about the EBARs of some of my young NHCEs. What are the rules about making a "corrective contribution" or "bottom-up QNEC" as far as plan design or amendment goes?

For instance, if I'm going to single out a couple of youthful NHCEs to boost what I can offer my HCEs, what is the legal mechanism? Do I build it into the Plan, or do I amend annually to provide specific amounts for specific NHCEs?

[Tom Poje]

the gov't frowns upon it if corrective amendments become a recurring pattern, and I believe bottom-up QNECs are now out (mainly due to the fact 415 limit is now 100% of pay)

you would be better to have a copule of classes of favored ees and allocate less to the younger class (e.g. junior executives), thereby avoiding the problem of QNECs, etc.

[rcline46]

Tom, you are very conservative. We actually make ALL of our cross testing plans fail (after the 3 or 5%). Then selective raise 1 or 2, one time 3, NHCEs to pass the ABPT and rate group testing. We do not believe the IRS can do anything about how often a corrective amendment is used.

As to bottom up QNEC (providing in doc of course) you are right that its usefullness is now limited. However, a QNEC is not required to have economic substance while the -11(g) must. Its worth a looksee.

[Guest LWilson]

Okay, so let's say I go the corrective amendment route . . . the plan is amended for the particular plan year, specific employees are noted as receiving this extra piece, notwithstanding the gateway contribution . . .

Where can I find rules regarding these corrective amendments? Has anyone published an article on the process for correctively amending for this specific purpose?

Frankly, this will be the only way we can make this plan attractive to our HCEs, so if I offer this corrective amendment loophole I want to make sure it is done properly.

. . . What is the -11(g) that you are referring to?

[AndyH]

The reference is to regulation 1.401(a)(4)-11(g)

...and...I think most people would agree with Tom. Designing plans to fail isn't the way most people would go. This is about as mild as I can put it.

[Guest LWilson]

We have some youthful Dr.s who have asked us to look into a New Comp design because the Target Benefit Plan they have isn't doing them any favors.

I am certainly not trying to come up with a design that's destined to fail . . . I am hoping to maximize the benefit we provide HCEs . . . And the Dr.s want to come as close to $40K as they can for 2002 . . .

I shudder to think that the more "legal" approach is to suggest they "monitor the demographics" of their staff personnel . . .

Nevertheless, I can see New Comp may not be in their best interests if we don't have the flexibility we were hoping for.

Thanks.

[AndyH]

A new comp plan is a flexible target plan! The allocations work the same way except there are fewer allocation levels in a New Comp plan whereas a target would have a different contribution level per age, comp level, and participation history.

With a young group of doctors you're going to have to either give them lower contributions, use something not age-based, or use a creative design by incorporating eligibility exclusions for some HCEs and general test it.

Any single plan covering both old and young doctors is always problematic. There's only so much you can do. Sell them an annuity (half kidding) if they don't like the plan! Or a real estate limited partnerhip in the Everglades. Great tax write off.

[Guest LWilson]

Interesting . . . my wheels are spinning now, so allow me to just beat a dead horse here one more time . . .

My earlier perception of our New Comp Groups was that we're dealing strictly with Dr.s and non-Drs. I'm thinking perhaps we can look at our classes of employees from a different perspective . . . it may not allow our young Dr.s to max, but it might perhaps allow them a somewhat more generous allocation rate . . .

Would it be kosher to create Job Class Groups (Dr.s and Non-Dr.s), and then within those Groups create Age-based Subgroups such that we end up giving our youthful NHCEs a higher unspecified allocation rate, and we provide our youthful Dr.s with a lower unspecified allocation rate?

For instance . . . Group A - Dr.s born after 1/1/1955

Group B - Dr.s born before 1/1/1955

[AndyH]

Yes, you are on the right track, but there are potential age discrimination issues when you identify the groups in such manner, so I would caution against that. Just as you wouldn't want to have two classes, men and women.

But, the concept is the same, just call it doctors with less than x years of service, less than x% owners, etc. Just some way of accomplishing reverse age discrimination without appearing to do so.

And once you learn this stuff you'll learn some fancier approaches such as component plan testing where some people are tested on a benefits basis and some on a contributions basis. But you need some experience to mess with that.

But, for now, using more than 2 groups can get you closer to where you want to be.

[Guest merlin]

Can you get any mileage out of a 401(k) , maybe even a safe harbor,with a class allocation of the er non-elective contribution? Some times it helps to have a younger HCE defer $11000 and have the er nec make up the remaining $29000. The older HCE can get the full $40000 from the nec.If they're owners to them it's the same money. Your tiered allocation will only test on $29000 for the younger HCE.If the $11000 deferral creates an ADP problem, either give QNECs or make it a Safe harbor .Your client is probably looking at a 5% gateway anyway . The 3% to the NHCEs will count as part of the class allocation as well. But remember that the Average Benefit % test will include the deferrals and match,if any. And you can't impute disparity on the 3%.

[Guest LWilson]

The most I can give three of my whippersnapper Drs. is about $3,000 . . . or else everything flunks bigtime, General AND ABT.

These are my assumptions - All HCEs are deferring $11,000. I'm assuming a Safe Harbor Er NE Contribution of 3%, and adding on the 2% Er to create my Gateway. Here's the problem: We have eight doctors, and the oldest one is 47. On the other hand, our staff is primarily composed of people in their 40s and 50s, with a sprinkling of (3) people in their 20s.

You see the dilemma? I can give my NHCEs as a group a higher allocation, and it just doesn't make that much of a difference . . . but if I could just legally target a few NHCEs . . . sigh

The Target Benefit Plan they have in place currently is just about comparable to a No Frills version of the New Comp Plan. So I've either got to do something Frillsy with how I classify my Groups,

. . . or maybe I ought to look into Permitted Disparity . . .

[Blinky the 3-eyed Fish]

Have you tried a minimum flat dolar allocation? It is usually helpful because the younger employees make less, so the minimum goes a long way.

Also, going back to Andy's comment regarding component plan testing, this is the type of plan that's ripe for it. So, I would certainly consider looking at that as well.

[Tom Poje]

based on your population, it just doesn't sound like a great candidate.

consider, you said you had 8 doctors.

if you take the youngest doctor, assuming age 25, and he has the highest e-bar. No matter what, you will need at least 1 NHCE in his rate group.

if the NHCE is age 21 that is a 4 year difference.

1.085^4 = 1.38, so if the NHCE gets 5%, the HCE gets 6.93%.

not a big difference is it?

component testing will help, along with permitted disparity, but you just can't do much for young doctors.

possibly testing using accrued to date rather than current accrual, but now you are getting even more complicated.

There is no reason you can't name each doctor by name for his/her own class. I have seen that done.

[rcline46]

Because a new comparability plan requires the sponsor to specifically allocate the contribution by group (X$ to Group A, Y$ to group B and so forth) then the allocated $ might not pass the test. If I can save a client several thousand $ by choosing the allocations correctly and live within the guidelines the so be it. That is my job! That is what new comparability is all about. To be more conservative is fine, but to even suggest that not doing everything in my power to provide the best benefit to the owners might be too aggressive...

In LWilson's case the most aggressive approach is necessary. However, the client needs to pay, and pay well for the work. If they don't, then they will not appreciate the effort.

[Guest LWilson]

Thanks everyone for your input.

I have contacted a local expert in our local benefits community, and she's going to give me a personal workshop in component plan testing.

I wouldn't have known to look into this without your comments.