Floor-Offset & 401(a)(26)

[Dougsbpc]

Suppose you have a new non-safe harbor DB that is offset by a new profit sharing plan. The DB will provide 5% of pay per year of partic for shareholders and 2% of pay per year of partic for non-shareholders. All benefits are offset by the act equiv of profit sharing balances. The employer will make contributions of at least 7.5% in the profit sharing plan. However, they wish to provide no profit sharing contributions to the two shareholder employees in the profit sharing plan. The plan easily passes the general test and they will have no problems with 404(a).

1.401(a)(26)-5(2)(iii)(A)(2) states that an employee whose benefits are offset is deemed as benefiting but only if he/she benefit in the other plan on a uniform and reasonable basis.

Does this mean that we simply do not count the two shareholder employees for 401(a)(26) purposes because their benefits (in the DB) are not being offset? Or does this mean that we cannot count any participants because two HCE's did not receive the same contribution as every other eligible participant in the profit sharing plan?

Thanks much!

[Everett Moreland]

My reading of the following first sentence of 1.401(a)(26)-5(a)(2)(i) is that the requirement in 1.401(a)(26)-5(a)(2)(iii)(A)(2) is a plan requirement, and so the requirement is not satisfied as to any employee unless all employees who benefit under the DB plan also benefit under the DC plan on a reasonable and uniform basis:

"An employee is treated as accruing a benefit under a plan that includes an offset or reduction of benefits that satisfies either paragraph (a)(2)(ii) or (a)(2)(iii) of this section if either the employee accrues a benefit under the plan for the year, or the employee would have accrued a benefit if the offset or reduction portion of the benefit formula were disregarded."

[Blinky the 3-eyed Fish]

I recall there have been other discussions on this board relating to this topic. The definition of reasonable and uniform for this purpose is highly speculative. The fact that 2 shareholders do not receive PS contributions could possibly meet such criteria. But the future IRS auditor of your plan might feel differently.

[Dougsbpc]

Everett

Thanks for your answer.

In this case I can just have the HCE's get the same % contribution as the NHCE's in the DC plan. I guess it really doesnt matter as the total benefits from both plans (for the HCE's) will be approximately the same as if they were receiving $0 in the DC plan.

Just curious though, would a safe harbor DC plan be considered a plan that provides uniform and reasonable allocations to all? If so, an HCE can receive lesser contributions in a safe harbor DC plan and it would still be considered a safe harbor plan.

[Blinky the 3-eyed Fish]

That type of question is what I was trying to answer for you. The answer being it is not clear what reasonable and uniform are defined to be for this purpose. So, maybe that scenario is reasonable and maybe not. Maybe a cross-tested DC plan allocation is reasonable, maybe not.

[Dougsbpc]

Thanks for the replies Blinky

I guess one option for us is to submit these plans for a determination letter. If the IRS determines the DB plan does not meet the minimum participation requirements because the two HCE's do not benefit in the DC plan, they will let us know.