help with classifications

[Guest ANNEBV]

small dental practice

husband is "primary owner" dentist (sole owner currently)

wife is hygenist

new, associate dentist is young & will be buying into the practice over the next few years

staff

how can i get husband and wife in one class so that they each get max $40,000 contribution, associate dentist in his own class

& staff in their own class?

my dilemma is how to get husband and wife into same class & be able to give lower allocation to associate dentist until he has significant ownership.

if i have an "owner" class, it will automatically include wife due to family attribution? can i further distinguish ownership in classifications such as "ownership in excess of X%" or something like that?

staff will always just be "staff" or perhaps "full time staff' and "part time staff".

how does everyone feel about multiple classes, other than just HCE & NHCE, which is what you typically hear about or read about in seminars or publications?

[AndyH]

You can call them whatever you want that is not ambiguous, by name if you wish. How about "Majority Owners and Spouses of Majority Owners" or "Majority Owners including Majority Owners by attribution", but you don't want to do that if a child becomes employed.

[Fred Payne]

My impression is that, from previous threads, there is a disagreement as to whether or not classifications can be established using people's names.

Has anyone received a FDL in which people's names were used?

[Tom Poje]

we have gotten determination letters for plans using names.

1.410(B)-4(B) clearly states that classifcation by name is not reasonable. so, if your plan fails the ratio percentage of coverage, and you have classes by name, I think you are stuck.

however, for purposes of cross testing, 1.401(a)(4)-2©(3(ii) clearly states that to pass the classification test you only have to pass the midpoint test among the rate groups. The reasonable classification is deemed to pass.

[AndyH]

Tom, I think your second paragraph is true only if the criteria for eligibility for the plan is unreasonable, not the criteria for classification of contribution levels. Agree?

For example, assume a controlled group of two companies in separate geographic regions each with 20 employees each. One company has 1 HCE and the other has 3.

The company with 3 HCEs has a plan covering employees of that company only who are age 21 with 1 YOS.

Then, for allocation purposes, there are two classes, one for people with blond hair, and the other for anyone else. Blond hair people get 5% of pay and everyone else gets 2%.

I think the plan can use either ratio percentage (which fails) or average benefits for coverage purposes since the criteria for eligibility is reasonable, even though the criteria for allocations is not. Agree?

[Guest John Nelson]

Why not provide in your document that each "owner" (direct ownership or indirect ownership under the Code's attribution rules) shall constitute his or her own individual rate group? Will this solve your classification problem?

[Tom Poje]

Andy:

If my owner was the only blond, then I think the IRS would argue that the classification was the same as if you had the classes by name rather than by hair color and say it was unreasonable. But if there were other blonds then it would probably be ok.

[actuarysmith]

I had the very same scenario.

I went with -

Group A - Owner Dentists

Group B - all others

You could modifiy this if necessary to specify a particular ownership %.