Design Question

[Guest KHayes]

I have two separate clients who have now become an affiliated service group. The first employer [Company A] has 2 owners, age 57 and 34 and one rank and file employee, age 25.

The second employer [Company B] has 2 owners, age 27 and twelve employees ranging in age from 26 to 30. The rank and file salary range is fairly high, with the lowest being $48,000 and the highest being $90,000. The owners earn $120,000 each.

Company A had a profit sharing plan which allocated 5% to employees under age 30, 10% to employees under age 40, and 30% to employees age 50 and older. It passed all of the coverage and benefits tests.

For 2003, the owners of Company B were the only eligible employees and they contributed $40,000 each to a Profit Sharing Plan.

In 2004, there are seven eligible employees in Company B in addition to the owners.

If I were designing this plan without regard to Company A, I would have recommended a 401(k) Plan in January of 2004 with a safe harbor matching contribution and possibly a supplemental employer contribution (allocated with permitted disparity) to maximize the owners. However, I wasn't brought into the discussion until a week ago, so it's too late to consider a 401(k) for 2004.

Because both of my owners in Company A are exactly the same age as the rank and file employees I won't get a plan to pass the 401(a)(4) tests. Even one percentage point higher in the contribution to owners will blow out the test.

Does anyone have thoughts about the best approach for 2004? I've already suggested getting a 401(k) plan in for 2005. With the relationship between the employers, we have to get something in place for the employees this year to preserve Company A's contribution scheme. I just want to be sure that whatever I recommend is the best possible option for both employers.

How would you design it?

Thanks so much!