Cross Tested with no HCE's?

[TBob]

We have a plan that wants to use a cross tested formula in order to benefit several of the company managers. The employees that they would like to benefit are older so cross testing seems logical.

None of the employees in the plan are HCE's. No one has enough compensation to make them an HCE and none of the owners of the company are currently employed. I am not sure how to go about testing this plan. Without HCE's does it automatically pass? Is it even possible to use cross testing when there are no HCE's?

[AndyH]

Cross testing is one method of satisfying Reg 1.401(a)(4), which states that a plan cannot discriminate in favor of HCEs. If a plan has no HCEs then it does not discriminate in favor of HCEs therefore the requirements of 401(a)(4) are satisfied without the need for cross testing or any of the alternative testing methods.

[TBob]

So, just to make sure that I am understanding correctly....I can create several groups within my NHCE's. I can max out group #1 at 42,000 for the year (assuming other limits aren't an issue). I can give group #2 some lesser amount. Group #3 gets stuck with a SHNEC and no other profit sharing.

You don't see any problems with this since there are no HCE's. Sounds too good to be true!

[AndyH]

Right. You have the normal issues to watch for, e.g. top heavy, 415, 404, and the plan document must support the groupings and allocations. But you have no a(4) or 410(b) testing.

[Sully]

As an aside: Why bother having a SHNEC if you do not have any HCE's?

I guess you could have a Key Employee in the plan but it does not look likely based on the information you provided.

[TBob]

Good point about the SHNEC. The plan came over to us with the SHNEC already in place. The plan did have an HCE but he passed away this year. We are looking at plan design changes for the future given the lack of HCE's.

[AndyH]

Just another note that you have an HCE who is not active, you do have to be aware of the benefits, rights, and features aspect of the 401(a)(4) regulations and under some circumstances some testing might be needed. But if all benefits, rights, and features are available to all participants on the same terms then that is a non-issue.