Combo 401(k) & New Comp

[pbarrett]

We have an employer (2 owners) who always fails the ADP test (no match). Each year both owners must take a corrective distribution of around $5000 each. They also receive a cross tested ps contribution.

Their CPA has suggested that they add their wives to the payroll. Pay them each $2000 and do not have them defer. This will enable the plan to pass the ADP test. In addition, they want to have the wives in a separate class in the new comp portion of the plan to help the two husbands with the new comp allocation.

To me, this seems somewhat "suspect." However, I am rather conservative. Does it seem appropriate to have them in the same group for ADP testing but in a different group for new comp allocations?

I'd appreciate greatly any feedback.

[AndyH]

There is nothing wrong with this provided they can be proven to legitimately "work" the number of hours required to participate initially in the plan, and to be eligible for employer contributions. Plus I'd make sure they were at least at the minimum wage for whatever hour requirement the plan has.

[kocak]

Or, since this is cross-tested, consider making it a safe harbor 401(k) and use the 3% towards your gateway. Then they can defer the max with no ADP test.