Can a company force HCEs in middle mgt to limit contributions, so that the plan will pass testing, while allowing upper mgmt to take full advantage of contribution limits (they are paid enough to max

[Guest grafals]

Our TPA firm has advised that their initial calculations reveal we will fail adp and acp tests this year. Rather than giving a qnec or forfeitures after the end of year, they suggested we have the hce's scale back contributions to X% (based on their calculations) for the remainder of the year, at which point, they project we'd pass.

However, among HCE's, most of the very highest paid maxed out their contributions early in the year. Therefore, the HCE's that would be scaling back their deferrals would be the bottom tier of HCE's.

The net result of this strategy might get us to passing, but, there seems to be a level of unfairness in forcing middle management to suffer while upper mgmt takes full advantage of the benefits available.

Having said that, I can't find any reason why this would NOT be a permissible way to correct (or rather avoid having to correct after year end). They might not be the highest paid, but it looks like where the code is concerned, an HCE is an HCE.

Here's the question in a nutshell, "Can a company force HCE's in middle mgt to limit contributions, to ensure the company passes testing, while allowing upper mgmt to take full advantage of contribution limits by virtue of the fact that they are paid enough to max out early in the year? Or would such a reduction have to be voluntary on the part of those mid mgmt HCE's?"

[Guest oxdougw]

What's the downside. Failure just means refunds. An HCE with $200,000 of comp deferring $12,000 is only putting in 6%. That alone may not cause the failure. I'd hesitate making any reduction manditory.

[Blinky the 3-eyed Fish]

The downside is that some people, who may not get any money refunded, are limited to what they can defer. The people who already deferred the max are having their refunds lowered or eliminated on the backs of those HCE's that have not maxed out their deferrals yet.

As for the original question, I think it is as you say, "An HCE is an HCE", and they are not protected from this tactic.

[IRC401]

Before you do it, make certain that the plan permits it.

If the plan document permits it, the SPD should also mention that the administrator has such discretion.

[GBurns]

IRC 401

Even if the SPD and PD etc permit this apparently discriminatory action, are you saying that there is nothing in the Code or Regs etc that would prohibit this?

Even if nothing prohibits this do you not think that such an action would leave the employer (Plan Sponsor) open for litigation for descrimination?

I would consider the suggestions by oxdougw and Blinky as the best course of action.

[mbozek]

Section 401(a)(4) only prohibits discrimination in favor of HCEs. There is no prohibition if a plan discriminates against some or or all HCEs. E.g., a Q plan could provide lower level of contributions for all HCEs. A 401(k) plan that meets the ADP test will be deemed to comply with IRC 401(a)(4). IRC 401(k)(3)©.

I dont know what other discrimination would apply to HCEs as a group.

[Jean]

The plan document probably is very clear on how the plan administrator may reduce or stop an HCE salary deferral when it is

determined that the ADP test will not pass. I don't think that because some of them have reached their 402g limit means that

they are not considered in the reduction. The plan probably requires something like this -- the reduction or cessation of salary

deferrals begins with the HCE with the largest amount of elective deferrals for the year on the date it is determined the ADP

will not pass. All remaining HCE deferrals will be limited by such amount.

[Guest Kriso]

Focus on the PERCENT of deferral. That is what the ADP and ACP take into consideration. (See previous post by oxdougw). A HCE making $200,000 and deferring $12,000 is only at 6% while another HCE making $100,000 and deferring $12,000 is deferring 12% of compensation. The corrective measures will make you give a refund to bring all HCEs down to the same percentage of deferral which is 2% above the non HCE's. Thus the employee with $100,000 in compensation will be able to defer less.

[Mike Preston]

However, the complaint here is that those who deferred earlier in the year will somehow have an unfair advantage because they are not subject to the cutback in deferrals for the balance of the year. I don't see it as being unfair. Everybody could have, had they wanted to, put more money in earlier. The fact that they didn't was their own decision and this is one of the risks that they assumed by not putting money in the plan before the doors were partially closed.

[Blinky the 3-eyed Fish]

Everybody could have, had they wanted to, put more money in earlier.

Mike, have you lost touch with the common man? They might need to use it to live.

Unfair, yes. Discriminatory, no.

[Mike Preston]

Oh, you are going to get technical on me, huh? ;-)

In which case we state that:

1) Yes, it is discriminatory,

2) No, it is not prohibited discrimination, and,

3) Yes, it is still fair. <gd&r>

[ljr]

While it's good to plan to pass testing, it remains that the only way to max out for the HCE's is to have refunds. The TPA said it was an estimate. You should alert the HCE's to what will probably happen so no one is caught by surprise after they file their tax return early. It will all work out when testing is done. As someone else said, timing of contributions doesn't affect who gets a refund, it's the percentage of compensation and it feels unfair.

[Mike Preston]

I'm not sure I agree. Refunds, if it comes to that, are based on a "dollar down" concept now. Those that defer the most are saddled with refunds and the percentage of compensation that those deferrals represents no longer determines their personal share of the refunds. That is what the OP was complaining about. If the folks that deferred early in the year are the "heavy hitters", with compensation in excess of $200,000, such that their deferral percentage appears to be 6%, then THEY would be saddled with refunds if the test eventually fails. However, by limiting HCE's for the balance of the year such that the test does not fail, nobody gets any refunds, but the impact is essentially the same as if the test were to fail and those who deferred the greatest percentage of pay (the folks other than the "heavy hitters") were saddled with the refunds.

[ljr]

Mike - I stand corrected. You are absolutely right about the dollar down method. I must have forgotten what year it is.