Family Aggregation

[perkinsran]

This is a fairly fundamental question, but I will asks it anyway. We have a Doc and his spouse in a Profit Sharing plan. Doc makes about $350K and spouse makes $40K. We are converting the plan to a 401k safe harbor with a comparability ps formula.

Since we no longer have to worry about family aggregation, I assume the spouse is an HCE due to ownership attribution, but the spouse is tested totally separately for 401k and 401a4 as a separate HCE. The spouse will defer $11,000 of salary and we could, but have chosen not to, include her in the comparability additional amount.

The interesting thing is the spouse actually helps with the a4 testing since (1) she was not getting the extra comparability contribution; (2) she is one of the older employees; and (3) she was at the bottom of the ABRs as an HCE. Seems to good to be right?

[Blinky the 3-eyed Fish]

Advising clients to legitamately hire a spouse or child is common plan design advice as it can always help the testing to have HCE's with no or limited accruals.

[Richard Anderson]

Very high deferral rates for low paid HCEs frequently will cause the Average Benefits test to fail. Are you sure that it passes AB test?

[perkinsran]

The plan actually passes the rate group coverage testing before getting to the ABP test. The doc ends up about in the middle with 15 people and his spouse is on the bottom. If it weren't for her being included in the Rate Group coverage testing, the plan would fail and be required to go to ABP tests.

[AndyH]

Late to this discussion, but Richard's point is right on. As soon as a couple of people terminate, you'll probably need to go to Average Benefits, and then you'll fail.

[dmb]

If the profit sharing portion is cross-tested, wouldn't the plan have to pass both the rate group test and the avg. bfts test??

[perkinsran]

The profit sharing contribution is first tested under rate groups and if each rate group can pass, the plan would be considered passing coverage.

If any rate group fails, the plan would have to go to ABP test and deferrals are then included in the testing. As was mentioned earlier, if we get to this step, the plan is likely to fail and we would get to this step if we have some terminations that make rate group coverage fail.

[dmb]

I assume the rate group test you're talking about is the not the midpoint test, but the basic 70% test on each rate group??

[perkinsran]

Correct. The rate group is that each group must satsify the 70% coverage test.