Can you exclude HCE from a Profit Sharing Plan?

[Guest Michael Anderson]

We have an owner who would like to establish a profit sharing plan for his employees, but may not always want to contribute for the HCE's (Mainly himself and other family co-owners) Can he do this? Can he do this, but then later decide he does want to include the HCE's? Say..... years 1 and 2 are not so profitable and he only wants to contribute for the NHCE, but then year 3 is great and he wants to contribute for the HCE's too??

Thanks - Mike

[WDIK]

You might wish to explore the option of a cross-tested plan design with the HCE's designated as one (or more) allocation groups.

[Bird]

Yes, you can do it, but you have to make sure you allocate the contribution in accordance with the document. As WDIK notes, you can have a plan with "groups" in which different contribution levels are permitted for each group. You could also simply exclude the HCEs, and yes, you could amend the plan later to include them. You have to be careful on the timing of the later amendment so that you're not effectively reducing the NHCE allocations after they are earned (if the plan requires employment on the last day of the year, then the right to an alllocation is generally earned on the last day of the year, so in that case you could amend as late as the day before the end of the year).

[Guest Michael Anderson]

Thanks for your responses. I think that is probably what we will do. Set up the plan to exclude them and then if they want to get in, amend the Plan. Good point on the timing issue, we will be sure to watch that.

[TPApril]

Following up on this thread - howbout a situation where the HCE-Owner wants only to contribute for her 1 staff and not for herself. Current formula is standard pro-rata. Can she amend for calendar plan yr 2013 so she is completely excluded, or must she treat as contributable compensation that what she has earned to date of amendment, and only exclude comp after plan change?

[BG5150]

What are the allocation conditions as it stands now? Is there a last day rule?

[TPApril]

yes.

[buckaroo]

It is only one staff and one owner, correct? Amend to New Comparability then the owner has the right to receive a cont in the future.

[BG5150]

Amend to use grouping method, everyone in own group. Or Owner and everyone else, etc. And just give the owner nothing. Automatically passes testing, as no HCE benefits.

[TPApril]

so to confirm, this new formula can be applied (somewhat retroactively) to current cal plan year 2013?

[BG5150]

Because no one accrues the right to an employer contribution until 12/31 (in this case), you aren't applying it retroactively, but prospectively to the end of the year.

Just make sure the plan can be amended in that way. (Can you have such an allocation on a standardized prototype?)

[Bill Presson]

Because no one accrues the right to an employer contribution until 12/31 (in this case), you aren't applying it retroactively, but prospectively to the end of the year.

Just make sure the plan can be amended in that way. (Can you have such an allocation on a standardized prototype?)

You would still make the amendment effective 1/1/13.

But you can't do it on a standardized plan and if they have a last day rule currently, it's already on a nonstandardized or VS.