Restructuring to allow 100% 401k for HCE

[Guest rickw]

I have doctor, spouse (who magically makes $12,500) and two NHCE staff. In regular cross-tested safe-harbor 401k plan, spouse deferring $11,000 would cause Avg. Ben. % test to blow up, right?

To avoid that problem, would the following work:

a) Restructure into Component A (doc plus youngest staff, even though fail "reasonable class. test") and Component B (spouse and older staff).

b) Use cross tested 3% SHNEC 401k for Component A and 3% SHNEC 401k as ONLY plan for Component B.

c) To pass 410(B) Ratio Percentage Test: Each component NHCE/HCE = (1/2)/(1/2) = 100%, so pass 70%.

d) For Component A to pass 401(a)(4) only have to pass NCT part of ABT (since passed R/P test already).

. (i) Per post by Mike Preston 1-24-02, I should be able to use safe-harbor mid-point % even though arbitrary assignment of NHCEs to components causes reasonable class. test to fail.

. (ii) Assuming NHCE has high enough contribution to be in doc's Rate Group, formula to pass is NHCE/HCE = (1/2)/(1/2) = 100%.

e) Component B is safe-harbor 401k only, with 3% SHNEC, so should automatically pass 401(a)(4).

Thanks!

[AndyH]

Your mechanics are correct if you only have a 3% SHNEC and deferrals, but you actually would not even have to test it if everybody gets 3%!

If there is a supplemental profit sharing contribution then it must be included in each NCT. If the spouse gets the same as the NHCEs and the EBAR of the youngest NHCE exceeds that of the Doctor then your scheme works as well. Is this what you had in mind? You didn't describe anything else subject to "cross testing".

It's not completely clear what your scenario is. If you are thinking that component testing can allow you to exclude certain contributions, then that is NOT ok.

[Guest rickw]

Andy:

I may not have made my first points clear. Component A with Dr WILL have cross tested contribution, but Component B will ONLY use 3% 401k (since AB% test would blow up if try to cross test with spouse's 100% 401k deferral.)

Thanks.

[AndyH]

Then, no, you cannot do that.

But what you can do is test component Plan B on a contributions basis for the NCT. The deferrals are never part of the NCT test.

If the ("cross tested" profit sharing)and the 3% SHNEC allocation as a percent of pay is the same or less for the spouse as for the NHCE in her component plan, you will have 100% coverage 1/2 / 1/2 in that rate group and the average benefits percentage test (where the deferrals must be included) will not be necessary.

You must always include nonelective contributions in the NCT test and never include deferrals or matches. And you must always include all of the above in the average benefits percentage test. Restructuring into component plans cannot alter this reality. But it can help you pass NCT and perhaps avoid the average benefits percentage test.

[Guest rickw]

Perhaps I am misunderstanding the required "linkage" to test the Plans.

Since the spouse and NHCE in Plan B will ONLY get the 3% nonelective contribution, their contribution rates are the same. So why do I even need to think about the NCT for Plan B?

If the EBAR for the NHCE in Plan A is appropriate, then Plan A would pass the NCT per my math earlier.

Thanks again.

[AndyH]

I am assuming that the spouse and second NHCE must be included in the test. If so, it sounded like testing them all together will result in one or more rate groups less than 70%. That would require you to proceed to the average benefits percentage test which you might fail due to the spouse's deferral.

But if you test separately, as you suggest, testing one on a benefit and the other on contributions, both component plans may have ratiio percentages of 100%, in which case you do not have to proceed to the average benefits percentage test, so the deferrals would not be an issue.

There are two issues unanswered here, however. How do you satisfy the gateway requirement if one of the NHCE gets only 3%. Are you limiting the Doctor to 9%?

Second, on what basis are you excluding the spouse and the second NHCE from the discretionary contribution? If the eligibility provisions are not "reasonable", then the ABPT is not even available to you.

[Guest rickw]

Andy:

1. I was assuming that the reason for "restructuring" was similar to having two entirely different plans: A = SH 401k Cross Tested and B = Sh 401k ONLY. As long as I could pass aggregated kind of testing, then all was fine. Am I incorrect?

2. I assumed only the NHCE in Cross Tested Plan A would need to get 5% Gateway, and that it would not apply to NHCE in Plan B at all. Am I dreaming?

[AndyH]

1. Restructuring does not affect the type of money being tested, only the bodies.

2. That is not correct. Anybody (NHCE) in the NCT test as a whole (whether or not in a separate component plan) is subject to the gateway. B must get the 5% also if the Doctor gets more than 9%. Said another way, restructuring cannot be used to avoid the gateway applying to someone.

[Guest rickw]

Hmmm... So, if I essentially have to have a cross tested contribution structure for both component plans, I am dead due to AB% test.

If so, how do folks with a very small plan ever get the spouse able to take advantage of the 100% 401k deferral?

[AndyH]

Somehow we are not connecting. You simply give each NHCE at least 5%, then test as component plans like you planned to do. But test one on a benefits basis, and one on a contributions basis (this is not cross testing). You should be able to avoid ABPT, and therefore the deferrals don't enter the picture.

Anybody care to help me out here? I don't seem to be getting the idea across. Maybe it's the contributions based testing:

It's simple:

Spouse 3%

NHCE 5%

One rate group covering 1/2 NHCEs and 1/2 HCEs. 100% coverage. ABPT not required if plan A has the same result by using cross testing (which this component plan is not doing).

[Guest rickw]

Andy: If I was off base thinking I could have two different "plans", then it sounds like your earlier comment now needs to be addressed: <

If maxing out the Dr. in Plan A requires, say, 8% cross tested contribution for that NHCE (i.e., in excess of 5% gateway), can I avoid giving the other NHCE the same 8%? Or do I simply compute required cross tested contribution/allocation for everyone, with the restructuring objective just being to pass testing without using the AB% test and exclude the spouse by classification from the cross tested participation?

[AndyH]

Rick, your second paragraph sounds like you are on the right track.

Your optimum design would be to max out the Doctor, give the youngest NHCE what is needed (8% sounds reasonable), give the second NHCE only the gateway (5%), and the spouse either 5% or exclude her by class. This is the way the numbers work best, but of course your plan document must allow this.

And, to reiterate, there is no need to exclude the spouse; limiting her to the same contribution rate as the older NHCE will pass testing by using restructuring as detailed earlier.

[Guest rickw]

Andy: I appreciate your patience!

But, back to your observation, how do I avoid giving the Plan B NHCE the same, say, 8% contribution as the Plan A NHCE? Just define a separate Classification?

It sounds like if anybody sneezes or a staff person leaves, this whole thing will blow up as more sensitive than a normal cross tested plan--which can be bad enough!

Any other clever way to get the spouse 100% 401k in a small doctor's office?

Thanks again.

[AndyH]

Yes, you need to define separate classes, unless your plan document has some sort of "catchall" provision that will automatically provide that NHCEs get the gateway if nothing else, or you could do this by 1.401(a)(4)(11)(g) corrective amendment.

Yes, you are right about the sensitive demographics, but as long as you have 2 HCEs and you are treating one like a regular employee, this plan structure can often last. I wouldn't put a last day or 1,000 hour requirement on this, though.

And no, I can think of no other tricks for the spouse. Good luck!

[Guest rickw]

Andy: Just about done...

I have not implemented the restructuring approach before. Does that have to be specified in the plan language, or am I free to slice and dice the staff anyway I see fit as long as I can pass all the tests?

[AndyH]

No, the restructuring is a testing method which does not need to be in the plan document. But make sure you aren't working with a plan document that DOES tell you how to test. Some bad ones do, even though they are not required to, so they can "cramp your style".