Self-employed 401(k) profit sharing plan

[pmacduff]

I know this has probably been asked before, but I have searched the boards and looked through the Pension Answer Book and Sal's ERISA outline book and can't seem to find this exact Q&A...If a profit sharing 401(k) plan has a discretionary profit share, can the partner's elect to contribute different (lessor) amounts? Here's the example. Doctor plan where the Doctors are too young and the staff too old to make crosstesting work. However, the highest allocation percentage to any one doctor is only 16.3%. If I give the staff 16.3% and the one Doctor 16.3%, can the other 4 partner Doctors contribute less than 16.3% for their discretionary profit sharing piece? It seems as thought they could, but......Thank you in advance.

[WDIK]

This discussion was one of the shorter ones.

However, your post does not indicate whether the plan is cross-tested or not. In my opinion, if there is no cross-testing, you would need to allocate equally (based on the formula) to all partners. If your document allows, there may be a possibility for those interested partners to make an irrevocable election not to participate in the plan. This raises some other issues as well.

[pmacduff]

WDIK - I did mention in my post that cross testing does not work because the Doctors are too young and the staff too old. I tried running a cross tested formula and would end up having to allocate over 20% to the staff in order to pass. That doesn't seem right when the highest allocation to any one Doctor is only 16.3%. So I went back to a straight profit share allocation of 16.3% to the staff and the one Doctor. But the other Doctors do not want to put that much in and don't want to waive participation completely. Isn't it said that it's ok to discriminate against the HCE employees? If this partnership is contributing 16.3% to the staff, where is the issue? If it were a set formula (i.e, a Money Purchase Plan) or if the Plan document had a stated formula for the Profit Share allocation, I would agree that all Partners would need to receive that amount. But since it is discretionary???

[WDIK]

Isn't it only the contribution amount that is discretionary? The allocation formula is stated in the document is not discretionary. With regard to discriminating against HCE's wouldn't that still need to be written into the plan document?

Sorry about the cross-testing thing. I had to reread your post three more times before I caught it.

[Archimage]

The $$ amount is discretionary, not the formula. You have to follow the formula that is stated by your plan document. You would have to explicitly have this written out in the plan document what you are wanting to do.

[pmacduff]

thanks for all replies. so - because the document says ps allocated comp to comp, this demands that all partners receive a comp to comp allocation. OK. Sigh. They aren't going to be happy. The partnership previously had a 20% MPP, those partners have since retired. New partners established 401(k) with discretionary PS and were looking for a way to decrease the staff contribution and yet still allow any or all partners to maximize @ $40,000. In a few years many of the older staff will retire and, with the Doctors aging, cross testing should work for them.

[Blinky the 3-eyed Fish]

Pmacduff, it's a 411(d)(6) issue as to when you can amend the plan. If we are talking about 2003, then the HCE's would have accrued the right to the contribution and the plan could not be amended. But for 2004, if there is a last day or hours requirement, then you could amend the plan now to put each HCE in his own rate group. Then you could give them less if they want.

Also, with this design try testing on a contributions basis. That way at least you can use permitted disparity. Or if you have some older doctors, you could use component plan testing.

[pmacduff]

Thanks Blinky - The plan is discretionary PS for 2003, but has cross tested allocation formula in the document. However, even with the each Doctor in a separate group, the base amount to the staff is higher than the old 20% MPP was (in order for the nondiscrimination tests to pass). Doctors don't really understand this. I didn't think about testing on a contribution basis so I'll give it a try. The oldest Doc now is only 42, the other 3 in their 30s.

[Mike Preston]

put each HCE in his own rate group.

/pedant mode/

his own allocation group.

/pedant mode/

[Blinky the 3-eyed Fish]

Pmacduff, your last post confused me. You say it is a cross-tested formula already. Is each doctor in his own rate group in the current document?

Mike, see I said "rate group" again. A prize to whomever can tell me who said this line, "He can be pedantic. He can be pedantic."

[Mike Preston]

Jason Alexander?

[WDIK]

George Costanza?

[JanetM]

Well Blinky, what do they win?

[pmacduff]

Blinky - Sorry to confuse. The Plan is written as a cross tested formula with each Doc in his/her own group. 99% of my cross tested plans pass the non-discrimination tests on the accrual basis. I use Relius, and the accrual basis is the default when you run the tests. I know it sounds idiotic, but I panicked when the plan failed so badly under the accrual method. I should have known to just go ahead and test on a contribution basis...guess I'm alittle tired during this season and not always thinking clearly. I appreciate all the help and thank everyone for getting me over my brain cramp!!

[Blinky the 3-eyed Fish]

Yes, both Mike and WDIK are correct. They win my everlasting respect.

Pmacduff, then you absolutely can give the HCE's less.

Now I want to know how the NHCE's are grouped. Are they all in the same group or separate or something else?

[AndyH]

I think all Benefits Linkers should unite and not allow Doctors to have their own rate groups. Make them have their own plans with their own fees so they can pay for the aggravation. And let'em self direct all the money into tax shelters.

[pmacduff]

Blinky - At this point all NHCEs are in one group. I'm 99.9% sure that the Doctors would not want to have any different allocations/allocation rates between NHCE staff. These Doctors have suffered much grief from the staff for eliminating the 20% MPP that the retired Doctors had in place. While the new Doctors are pleased to no longer have that 20% required contribution, they have had some PR problems (needless to say). But they love being able to max out and not need to give the staff 20%...God Bless America !!

Andy - if we took individual rate groups away from all of our Doctor Plans, we would not have any Doctor Plans, thereby taking food from our own mouths....guess I don't want to "bite the hand that feeds me" even if it tugs at my morals.