401(k) Top Heavy 2 year eligibility with some HCE's being capped in PS

[Guest mpark]

Plan goes like this:

Physicians practice

Top Heavy 401(k) Plan

2 year eligibility for Profit Sharing - Integrated with Social Security

Non partner physicians HCE's (call them A) are capped at $18000 in Profit Sharing

Another group of non partner physicians HCE's(call them B) capped at $8000 in Profit Sharing

1.Is this a cross tested plan

2. Are people eligible for 401k counted in 401(a)4 nondiscrim test

3. What if a4 fails, what is the remedy

I am at a loss - this is a takeover plan and sorely in need of a change

[Mike Preston]

If the allocation is such that it is pursuant to the integrated formula and the only modifications to that are that HCE's get less than they otherwise would be entitiled to, then it isn't cross-tested, as it satisfies the safe-harbor.

People eligible just for 401(k) are counted in 410(b) and 401(a)(4) test but can be restructured into a separate component plan if it works to do so.

a4 can't fail if 410(b) doesn't fail if the plan is a safe-harbor.

Why would a design that works well for a client be in need of a change?

[AndyH]

1. You hear a strange loud screech in the dark. Is it a cat? A lion? Bill Clinton upon learning he'd been impeached? Howard Dean?

Maybe. Maybe not (it could be a safe harbor). Much more detail is needed, such as what are the pay levels of the people and w hat are their ages. How are they being limited? By plan provision? How is that limit being imposed written?

2. Probably. What exactly is 401(k) eligiblity?; what is ps eligibility?

3. The 401(a) general test never fails; the client just runs out of money. Seriously, there are exaustive testing options to be explored before anyone can conclude that the test fails. And if it does, you fix it . See 1.401(a)(4)-11(g).

Sorry, Mike, our responses cross in cyberspace. I couldn't resist keeping Howard Dean in, though.

[Guest mpark]

401(k) eligibility is one year, age 21

Profit Sharing is 2 years, age 21

document is written so that Group A 's allocations and Group B's allocations, following allocation of integrated Profit sharing contribution, are capped

The employees in Groups A and B (Im only calling them 'group' to ease the confusion) are Highly Compensated Employees with salaries that range from $120k to $200k

they are being limited based on their job classification

[AndyH]

What do NHCEs get, and how is that determined?

[Guest mpark]

NHCE's get their share of the integrated profit sharing contribution

the only ones who are limited are highly compensated employees

[Blinky the 3-eyed Fish]

It's a safe harbor based on the information provided. I too want to know why you think a change to the formula is needed. Why is it not meeting the client's objectives?

[Guest mpark]

I was under the impression (or blind fear) that because we were capping some allocations that it was no longer a safe harbor allocation formula and subject to

(a)4 testing. Do you think, based on the information given, that the (a)4 test doesn't apply here?

[AndyH]

Well, see 1.401(a)(4)-(2)(b)(4)(iv) and (v) and you'll get by that concern. And, yes, if it is a safe harbor, then the a(4) tests do not apply, provided that you satisfy the coverage and benefits, rights, and features requirements.

[Blinky the 3-eyed Fish]

Take a step back and think of the reason for 401(a)(4) testing. It is designed to show that the plan is not favoring highly compensated employees versus nonhighly compensated employees. This is clearly not the case here, where you are capping only HCE's.

Ah, foiled by Andy's quick keystrokes again! And he even provided meaningful cites, while I provided only concepts.

[Guest mpark]

What would you say if one of the HCEs that is getting limited cuts his hours and becomes a NHCE in year? Would the Plan then be subject to (a)4 testing?

[Mike Preston]

If he is an NHCE, his benefit wouldn't be capped, would it?

[Guest mpark]

Any employee in that specified group is capped. None of those employees have even been NHCE, but there is a shakeup in the practice and some of these people may be going part time, which may lead to a few becoming NHCE based on compensation.

[AndyH]

mpark, your documentation is shaky. It is either a safe harbor or it is not. Read the cites I gave you. That tells you what is and is not permitted. A limit on dollar amount is ok, as is a limit on percentage amount. Or another limit that applies only to HCEs.

But maybe this is not a safe harbor candidate. These are issues you need to weigh. Testing what you describe should not be difficult if it is needed.

[Guest mpark]

Thanks everybody for all of your input.