OK for HCE group to choose zero contribution?

[Lynn Campbell]

Is it OK to set up a plan where 2 out of 3 HCEs are in a classification group that gets zero contribution each year? The 3rd HCE wants to max out. There are 1-2 NHCEs. This is a C Corp. Thanks.

[david rigby]

Perhaps I'm an idiot, but I'm confused by "choose zero contribution" and "gets zero contribution". They seem different to me.

[Lynn Campbell]

sorry to be confusing. they are the same to me. The 2 HCEs do not want a contribution to the Plan...

[QDROphile]

OK, the dirty little secret is out. Small plans that use sophisticated testing are violating the CODA rules right and left.

[Tom Poje]

Lynn:

Look at it this way.

Before the IRS said you could have 'class' plans, a company could have set up 2 plans.

Plan 1 for HCEs

Plan 2 for NHCEs

In a given year they could say that plan 1 receives 0 and plan 2 receives 5%.

The IRS was nice enough to allow you to achieve the same results in 1 plan by dividing people into classes.

In your case it sounds like you have an additional class for an HCE.

Again, in the old days, you could have set up a third plan just for him.

Does it constitute a CODA because it is accomplished in one plan by operating in this way?

I think thats debatable.

As to your particular question, can the 2 HCES get 0 and the other receive the maximum.

That depends on how you word your document.

You could have class 1 = HCE 1 (or some similar description)

class 2 = HCE 2

class 3 = HCE 3

class 4 = all others

[Mike Preston]

It is ok. It is not a CODA, in my opinion, as long as the ultimate decision as to whether they get a contribution (or not) and what level, is vested with the employer and not the specific individual. There is a significant issue here and that is the way things are done. If the HCE's in question sign a form at the beginning of the year that says: "I elect to defer no salary this year." then I agree with QDROphile that this is a CODA. Instead, is the decision as to what will be contributed made by the employer in some fashion? Then I don't think it is a CODA, even if the individual HCE's participate in the decision making process and make their preferences known. Form is exceedingly important here.

But there is one other issue to be aware of. If a new comp plan has any classes where individuals otherwise eligible for a contribution end up with none, then the IRS has stated, and I concur, that the net effect is that the plan can not use the Average Benefit Test. This means very little if the plan meets the 70% threshold. However, if it doesn't, then there will need to be additional NHCE's that benefit. This will happen most frequently when there are terminated NHCE's with hours in excess of 500.

Isn't it easier to provide via plan documentation that HCE's that do not wish to participate be excluded from the plan?