Discrimination testing for 3% SHNECs

[Guest Dash02]

Trying to establish new plan effective 1/1/2006 with 401k effective 2/1/2006. The plan provides for --

1. 401k defls.

2. discretionary nonelective contributions with a cross-tested allocation scheme (each participant consituting a separate alloc. group).

3. The ability to elect to utilize the 401k safe harbor provisions and to make either 3% SHNECs or SH Matching contributions.

The sponsor has only been in business for a couple years and is not making a lot of money. The owner wants to do something for himself and his EEs, but doesn't want to commit to much expense. The thought was to offer 401k and to provide a contingent notice regarding SHNECs (plan uses current yr testing). If business does well, these SHNECs can be made and the owner and his wife can make $15,000 in defls. It's unlikely that he will be able to afford or pass the general test in order to provide himself with additional (9%) cross-tested allocations.

It now occurs to me that the ave. benefit prong of the general test (which takes into account 401k defls) may not be met to validate the 3% SHNECs even if these are not provided to the HCE/owner. My question is whether these SHNECs satisfy the designed based safe harbor provisions?

Thanks for the help.

[mming]

It seems to me that if you provide the safe harbor notice, the plan must make the 3% SHNEC contribution. Generally, if the notice requirements are made and the SHNECs are contributed, the plan would be considered safe harbor. The results of the 70% test addresses the allocation method, not whether the plan is safe harbor.

[Guest Pensions in Paradise]

Dash - if I read your post correctly, you're asking about nondiscrimination testing. If you only provide the 3% SHNEC, you would pass the ratio test. You could even give the 3% SHNEC to the HCEs. So no need to use the average benefits test.

[Guest Dash02]

Thanks for the replies.

I had forgotten and/or failed to appreciate that pursuant to 1.401(a)(4)-2©(3), if every rate group percentage is over 70%, the general test is automatically passed without having to resort to the two-prong testing that is usually done (i.e., the nondiscrim. classification test and the ave. benefit test). Without having to perform the ave. benefit prong, the 401k defls., which were the source of my concern, never have to be brought into consideration.

When tested on an allocations basis, every rate group percentage is 100% because everyone gets the same 3% SHNEC and, therefore, everone is included in every rate group. As it turns out, the HCEs can receive more than the 3% SHNEC and pass the 70% ratio % test on a benefits basis.

Do I have this right?

[AndyH]

No.

Your 3% SHNEC is a safe harbor design. No 401(a)(4) testing.

Your 410(b) nonelective ratio/percentage is 100%. No further 410(b) testing of the nonelective.

Your 401(k) presumably passes r/p at 100%. No further 410(b) testing of that.

[Guest Dash02]

Thanks Andy.

I assume your answer would be different if, in addition to the SHNEC, the ER made a discretionary nonelective contribution that all got allocated to an HCE under the general cross-tested plan design. In this case, wouldn't 401a4 testing of both these amounts (SHNEC and the profit sharing dollars) be required.? If so, can the ave. benefit prong (which takes k defls into account) be avoided if every rate group has a ratio percentage of 70%?

[AndyH]

Yes and yes.