Owner's young child

[wsp]

Just curious on how everyone handles this? Do you have each rate group name the participant in it specifically so that the owners child can be excluded and/or given a zero benefit?

Ex> Joe Schmo runs his own roofing firm. He has a new comparability plan that is working nicely and is maximizing his contributions. However, the heir to his roofing empire has just graduated from design school and needs to earn money to eat. Joe Schmo hires Joe Jr. to work for his company. Joes sole responsibility is to ensure that the company t-shirts are the best in all the land and that each employee wears it on a daily basis. Joe Jrs. Official title is Company Fashion Consultant. If you had them categorized as HCE and Non-HCE the plan would fail 401a4 miserably. So we must create a new category so that Joe Jr. can receive a zero contribution.

How do you categorize them now.

ie: Rate Group 1: Joe Schmo

Rate Group 2: Joe Jr.

Rate Group 3: All Others

or Rate Group 1: President

Rate Group 2: Company Fashion Consultant

Rate Group 3: All Others

[jquazza]

How about:

-Direct owners

-Owners by attribution

-others

Also, you have to be careful when an employee meets the condition to get a contribution and end up with nothing, especially if you take it to the avg. ben. test. Blinky can tell you all about it.

[Tom Poje]

in addition, watch top-heavy. if you say 'all ees get' then all means all.

if you say 'all non keys get top heavy' then you can accomplish what you want.

assuming of course it is a typical cross tested plan - very few are not top heavy

[AndyH]

You don't need to give the kid nothing. You can give him the same percentage as "All others" and test him along with one or more NHCEs in the same group on a contributions basis. Each of these two groups must pass the ratio/percentage test. This is component plan testing.

[Blinky the 3-eyed Fish]

Defining groups by name though is certainly fine. Follow Andy's advice if pops wants to give the little fashion boy something.

Tom, you are back on top!

[wsp]

Specific plan that needed the discussions has over 50 participants and average pay is sufficiently high that plan shouldn't ever be top heavy. Owner and other keys get about 46% of contributions each year. In addition, plan has a very very generous entry period (3 months) So not many exclusions. Owner was giving 5-8% in profit sharing previously with same provisions, just wanted to bump up his own account without contributing more for rest.

I like the owner and owner by attribution except for the fact that owner's son is youngest in company and thus needs to get zero. So we need to distinguish him from other kid, correct? Can't give him one and the other zero. Not sure exactly what component testing is so can't see how it can work in the actual scenario. How can you use rate testing for one group of HCE's but contribution testing for another group of HCE's? And, wouldn't that have to be written in the document before hand or is that another change that can be made prior to anyone accruing a benefit?

[AndyH]

It is a testing technique permitted by the regulations under 1.401(a)(4), specifically identified at 1.401(a)(4)-(9)©. Testing assumptions and technicques do not have to be in the document.

All you need to do is inherit a DB/DC combo designed years ago by Ed Burrows and test it year to year and you'll have it down pat. Either that or the test will never pass, that is.

[SoCalActuary]

If the youngest gets a 5% benefit, this will have an effect on the Avg Ben Pct Test.

Not a problem if each rate group passes as 70%, but potentially fatal to a test that needs the ABPT for individual rate groups.

I don't see how component testing solves the ABPT problem.

[AndyH]

True, but as I said on my 4/13 post, most of the time, with component plan testing the ratio percentage test must be satisfied with respect to each component. Under such circumstances, there is no ABPT.

Usually when I do this, the components are cherry picked. To do so, each component must have a r/p of 70% because the criteria does not meet the reasonable classification requirement of the NCT part of the ABPT. Therefore the ABPT is not available.

For example, assume two HCEs, Dad and Son, and four NHCEs. Component Plan A is Dad and the two youngest NHCEs. This is tested on a benefits basis.

Component Plan B is comprised of Son and the other two NHCEs. This would be tested on a contributions basis. Each component has a ratio percentage of 100% (2/4 divided by 1/2). Each component passes coverage using R/P The ABPT is not required for coverage purposes.

As long as the two youngest NHCEs have an EBAR greater than (or equal to) Dad and the two other NHCEs get a contribution (as pct of pay) at least equal to SON then each rate group passes at 100%. Therfore 401(a)(4) and 410(b) are satisfied. No ABPT under either test.