Cross Testing with Deferrals

[Guest dpasi]

I have a takeover plan where the owner (57) and son (31) deferred maximum and owner recevied max contribution under SH non-elective and discretionary profit sharing. Son recevied same 2% PS as rest of staff. There are only six staff memebers and several are near age 50. When I ran the non-discrimination testing, it seemed to fail miserably under the Ave. Benefits Test. Am I correct to assume that the deferrals are requried to be included in the testing?

[AndyH]

Yup. If you provide the ages of the people I have an idea.

[Guest dpasi]

Thanks. Staff ages: 35, 35, 38, 56, 58 and 63. The all earned approximately $45,000.

[AndyH]

If the younger 3 staff members have a greater cross testing EBAR, and they should, depending on how much Dad received, then the following will work:

Restructure the 401(a) 4 testing group into two groups:

Group A is Dad and the three youngest staff

Group B is Son and the three older staff

Each Group, or "Plan" has a ratio/percentage of 100% so each pass coverage.

Test A on a benefits basis. If the 3 staff have a higher or equal EBAR to Dad, then Dad's rate group is 3/6 over 1/2 =100%

Test B on a contributions basis. Son has the same allocation rate. His rate group is also 3/6 over 1/2 =100%.

Since each rate group passes ratio/percentage the Average Benefits Percentage Test is not needed and the deferrals do not enter the test.

This is restrucuring or "component plan testing"

[Guest dpasi]

If the Owner is receving a 10% contribution, then the staff in his group would have to receive the same?

[AndyH]

The son, yes. The owner, NO. Remember, that group is being cross tested, so a much smaller contributon for the 3 staff will be needed to produce the same EBAR as the owner. You've got 22 years of interest to work with, so the 1/3 or 5% gateway (which all NHCEs must receive) would be more than enough.

If you give everybody else 5%, Dad can get up to the 415 limit. If the staff gets less than 5%, Dad can get no more than 3 X that.

[Guest Kevin1]

Andy: Can you clarify.

Dpasi asked if dad in group A got a 10% contribution wouldn't the others in Group A get 10%. I assume this is a 10% profit sharing contribution. I understand that group B would not have to get 10%. Are you saying the others in group A wouldn't get 10%?

Cross tested as opposed to age weighted.

Also, is there a potential age discrimination issue with this? Part of the definition is All employees age 56 or older are in group B (with the son).

[AndyH]

Since Dad's group is being tested on a benefits basis, a younger person can get a lesser contribution and have the same Equivalent Benefit Accrual Rate. Example, if Dad gets 10% and is age 60, and you test using 8.50%, someone age 59 that gets 9.22% (10%/1.085) would have a higher EBAR, so if you have somebody age 35, they would only need to receive (10%)/1.085^25=1.31%. But because you have the gateway issue, he needs 1/3 of Dad or 5%.

Discrimination, no I don't think so. Give all staff the same contribution rate-ages are used for testing only and justify only the higher allocation to Dad.

I agree it might be a bad idea to give older staff lower allocations than younger staff but I am not proposing that. They can get the same. Only testing separates them.

Is that clearer?

[Guest Dash02]

I thought restructuring was outlawed several years ago (at the same time as when the gateway requirement was instituted).

[AndyH]

Nope. You cannot restructure to avoid the gateways, that's all.