Maxing at $40,000

[Guest TAG]

Been out of this for a while. What is generally being considered as the "cheapest" way to max 1 HCE out at $40K in '02..safe harbor plan or not. Thanks for your input.

[Tom Poje]

do the math

if the HCE makes 200,000, then to max him out at 40,000 takes a 20% contribution.

the minimum for NHCEs is the lesser of 1/3 of 20% or 5%, so you would have to put in at least 5%.

Then you still have to pass cross testing.

if the HCE deferred 11,000 then the profit sharing is only 29,000 or a 14.5% contribution. 1/3 of that is 4.833333.

oooooooooooooooooooooohhhhhhhhhhhhhhhh. a big savings of .17% that you have to give the NHCEs.

plus you have to pass the ADP test, and if you go safe harbor you are giving 3% fully vested SHNEC to people that might be short term employees.

you really have to base the decision on how easy it is going to be to pass your cross testing. obviously there is a big difference in E-Bars if you are giving a 40,000 or a 29000 contribution to the HCE

[pmacduff]

Tom - there also could be a big difference in E-bars depending on the age demographic of the Company...agreed? I have a number of small Employer plans where the owner is quite a bit older than his/her workforce, they use a cross tested plan with 401(k) feature that allows the rank & file to defer and the HCE to max without deferring so there are no testing issues.

[Tom Poje]

yes, but look at the numbers and do the math.

consider an owner making 200,000, no deferrals, and you provide 40,000 contribution.

that is 20% of pay, so the gateway is 5%. (A difference of 4 times)

1.085^17 = 4.0026, so if you have a considerablly younger workforce (difference in ages is greater than 17 years), then an age weighted plan will actually require a smaller contribution, because you pass the gateway not by using a minimum allocation, but by using smoothly increasing rates! And generally under that scenario you always pass cross testing as well!

[kocak]

also, with a 401(k) if they are >50 they may be able to do catch-up. This is only $1000 now but goes up quite a bit in the next few years and will make a difference on plan design.

mck