cross tested 401(k) Plan and imputed disparity

[Guest csk]

Testing the Profit Sharing Contribution under a 401(k) Profit Sharing Plan using cross testing, is it permitted to impute permitted disparity or does the 401(k) feature prohibit this?

[Tom Poje]

you are allowed to impute disparity, but not on any contribution that you can not apply the rules of integration to.

So you can't impute on the deferral piece, the match piece or the ESOP piece, or for that matter SNHECs and QNECs

thus, a person who defers but did not receive a profit sharing contribution would not have his E-Bar adjusted by imputing disparity.

[Guest csk]

I'm not sure I fully underdstand. When testing the Profit Sharing contribution, each rate group is tested to see if it satisfies the 70% ratio test - the deferrals, match, esop amounts are not involved in the Ebar. So I can impute permitted disparity when determining the Ebar for this Profit Sharing Contribution regardless if the participant has deferral?

Is imputing permited disparity only prohibited when calculating the average benefit percentage that include deferral, match, esop...?

Thank you.

[AndyH]

Regarding your first question, you could impute on the entire EBAR except for any QNEC or SHNEC if that is part of it. If you have a SHNEC or QNEC included in the EBAR, you must break it out and inpute on the remainder, then add it back in.

For the ABPT the same applies. Anything that Tom listed that is included must be taken out. Inpute on the remainder, then determine the benefit percentages attributable to the excluded items and add that back in.

[Tom Poje]

or put another way

Avg Ben % test E-Bar =

def + match + profit sharing +(imputing disparity on profit sharing only)

Nondiscrimination Classification test

(or Rate Group E Bar)

profit sharing +(imputing disparity on profit sharing)

I have seen very few cross tested plans pass the nondiscrimination classification in which the ratio % test > 70%, though it is possible. That is why I mentioned the avg ben % test

[MBCarey]

My boss and I were just discussing this same thing. So it is possible to have a Safe Harbor 401(k) plan with a 3% Non elective contribution and then spread the remaining profit sharing contribution using integration?

I know the Safe Harbor cannot have last day, but can the last day be imposed on the profit sharing piece?

[AndyH]

yes, to #2. Your first question is not clear.

[Tom Poje]

yes (I think if I understand your question), in that case you have

avg ben % test

def + match + SHNEC + (profit sharing and disparity on the ps)

rate group test

SHNEC + (profit sharing and disparity on the ps)

since the max disparity when cross tested is generally an adjustment of .65, unless the ps piece is extremely low (or the individual is especially old with a small ps piece) it probably wont make a difference that you can only impute on the ps portion only.

[MBCarey]

Tom,

To say it simply.

I can do a Non elective Safe Harbor 401(k) contribution of 3% which will go to all eligible employees whether they defer or not and whether they are employed at the end of the year.

Then I can allocate a profit sharing using integeration and have the last day rule apply. I can use permitted disparity to pass the ABT on the PS piece.

Is this right.

Thanks

[Tom Poje]

lets say enough pr was made to allocate 4% base + 4% excess you would then have:

avg ben % test

NHCE E-Bar = def + match + 3% SHNEC + 4% PS + impute on the PS piece

rate group test = 3% SHNEC + 4% PS + impute on the PS piece

HCE = def + match + 3% SHNEC + (4% PS + 4% excess) + impute on the PS + excess piece