Cross-tested with a match

[FJR]

General question on SH 401(k) cross-tested plans that allocate the 3% SH and allocates the rest under profit sharing. Using cross testing, what is the effect of adding a discretionary match? Wouldn't this lower the highest allocation rate for the HCE's thus lowering the NHCE's rate? This seems like a better design, especialy if very few NHCE's contribute to plan. Disregard the matching cont. for rate group testing?

any thoughts appreciated

[AndyH]

The match does not affect the rate group test, nor does it impact the minimum gateway, so if you have a match you must provide the gateway (lesser of 1/3 or 5%) on top of it. So, yes, as you mentioned it may lower the target it does not lower the gateway nor may it be used in the rate group test so it is not usually a good idea. But in some situations it helps for the reasons you described.

[Guest Pensions in Paradise]

Matching contributions are not taken into consideration when determining the rate groups or calculating the ratio test. However, if you do not pass the ratio test then the matching contributions have to be included when calculating the average benefits test.

[Tom Poje]

your gut feeling is correct.

comp = 210,000

max deferral = 14,000

415 limit = 42,000

so w/o match, profit sharing = 28,000

28,000 / 210,000 = 13.33%

so gateway = 4.44% (lesser of 1/3 or 5%)

if ee received 8000 in match then profit sharing is only 20,000.

20,000 / 210,000 = 9.52%

so gatway = 3.17%

since plan will undoubtabely be top heavy heavy, you really can't do much better than that.

however, another problem arises. the HCEs total contribution remains the same, 42,000.

in other words, to achieve a smaller gateway, you have replaced 3.8% profit sharing with 3.8% match.

unless you do the same with the NHCEs (and if the NHCEs are not deferring much and so get little or no match) the test falls apart at the avg ben % test.

Of all the cross tested plans I have run, I have very rarely had one pass the ratio percentage test and therefore not need the avg ben test. In fact, I suspect what very few of those that exist would do better as an age weighted plan, and thus avoid the minimum gateway entirely.

[K-t-F]

Tom.. using your example, if it was not a match but rather a SH 3% NEC, can the 3% be part of the gateway? and will it (the 4.44% gateway) also cover TH in essence killing 3 birds with one stone (gateway, SH, and TH)

[AndyH]

Yes, of course.

Also, to be considered is that the gateway alone may not be sufficient to make the rate group test pass if the ages are not sufficiently different. If you need to contribute more than the gateway, and you have a match, then you may be overspending because the match does not help the rate group test.

[K-t-F]

which is why I thought the 3% NEC would work well....

I am still waiting for Toms "Cross-testing for Dummies" book

[Tom Poje]

sorry PATA, the closest is going to be the coverage and nondiscrim answer book.

doing my best to add more examples, I did add a few on age weighted calcs for the new supplement this year. maybe when they publish the book all over again I can add a chapter for 'dummies'

or you can sleep through one of my talks at the Fall ASPPA conference. I get to repeat the one on Safe Harbor 401k plans and Cross Testing (Though just getting through the basics of safe harbor doesn't leave a lot of time to toss in some info on how they effect cross testing.)

Looks like I may have to eliminate the 'pension song'. And if you sleep through the talk you'll miss a few 'surprise' slides that weren't in last year. Hmmmm. How is it that I somehow worked Star Wars into this thing...

On the serious side of the talk, it was really nice to hear a comment from someone who has been doing cross testing... "Oh that is what an E-Bar is and how they are generated".

[Blinky the 3-eyed Fish]

Nice to hear that comment or frightening?

[K-t-F]

Blinkey... that was my first thought... someone who has been administering X-tested plans and doesnt know what an EBAR is? I guess my wit is not as quick as yours... or maybe you have 3 b*lls in addition to 3 eyes when it comes to posting (Example REF: your post about the generous plan sponsor and the monument erected in his behalf). Maybe when I get to 2300 posts I will be as bold as you. I will admit... I enjoy your posts and found myself giggling when I read many of them. Lets hope that you dont beach yourself one of these days.

[AndyH]

SWHWT

[FJR]

Is it OK to not give the min. gateway to let's say 3 of 10 Hce's? The NHCE's would get 5%.

[Tom Poje]

Not sure if I agree with comments on 'knowing what an E-Bar is'

For example, I had Physics in High School, and another course in college. I could 'do the work' or 'know how to do the stuff' such as calculating resistors in parallel or in series. But it wasn't until I had a course in digital electronics that I really understod what was going on.

FJR: you can never pick and choose, you have to follow the terms of the document.

A document could be written to provide the minimum gateway to NHCEs only.

If you did that, and had HCEs in separate classes then conceivably you could provide a 5% to 3 of the HCEs.

Blinky: will you at least post a few more times so you can have more posts than I do?

[Guest lerieleech]

Do matching contributions count toward an HCE's allocation rate in determining the allocation percentage on which to base the required gateway percentage?

[AndyH]

No, they are apples and oranges.

[Guest lerieleech]

Thanks.

That would make sense. If they don't count toward the gateway percentage, they shouldn't count in determining the required gateway percentage. But I wanted to make sure.