Can 401(k) SHNEC be included in age or service schedule?

[Guest acmtpa]

I am designing a safe harbor 401(k) plan that utilizes the 3% SHNEC.

The plan will also have a profit sharing component.

I would like for the plan to qualify for cross testing through the use of a gradual age or service schedule.

If my profit sharing schedule (which we'll assume meets the requirements of 1.401(a)(4)-8) starts at 3% of pay, can this minimum 3% contribution satisfy the SHNEC and the top-heavy minimum required contribution?

Alternatively, must the plan make a flat 3% contribution and then make an additional profit sharing contribution with its own age or service schedule (for example a schedule that starts at 0.5% or 1.0%)?

[ERISAnut]

Yes, Yes, and Yes. The SHNEC have to be a straight 3%, immediately vested, and subject to withdrawal restrictions. The additional profit sharing may have a vesting schedule and less stringent withdrawal restrictions.

These amounts are included when testing under age weighted or cross-testing.

[AndyH]

acm, I'm not sure if your question was answered or not. It was a bit unclear IMHO. You all set or do you want to try and restate it?

I'm not sure how the second and third YES' can coexist if one is an alternative to another.

[Guest acmtpa]

I think I understand now, having looked back on some of the older postings regarding smoothly increasing schedules of allocation rates.

I have been confusing allocation rates (as they appear in age and service schedules), and actual allocations, such as the top heavy minimum allocation or the 5% gateway allocation.

The regulations only add to the confusion. 1.401(a)(4)-8(b)(1)(iv)(D) says that if there is a minumum allocation rate, or if the plan provides "the minimum benfit described in section 416©(2)" then the age or service schedule has to meet some additional constraints. 1.401(a)(4)-8(b)(1)(iv)(D)(1) says that the allocation rates that are greater than the minimum allocation rate must fit into a certain hypothetical schedule. In the case of a top heavy plan, there is no "minimum allocation rate". A minimum allocation rate of 3% would not necessarily satisfy the top heavy minimum for all NHCEs, as a 3% allocation rate does not imply a 3% of pay contribution.

I assume that minimum allocation rate is undefined in the case of a top heavy plan.

My plan is to use the following age-based schedule of allocation rates:

<25: 1%

25-29: 2%

30-34: 4%

35-39: 8%

40-44: 13%

and so on increasing 5% in each subsequent band.

I will first meet the top heavy minimum contribution (which will also take care of my 401(k) SHNEC), and the remaining employer contribution will be allocated according to the above schedule.

I believe this will permit me to cross test without providing the 5% of pay contribution.

Do you see any problem with this scheme?

[AndyH]

The "additional constraints" referenced in your second paragraph is exactly what I wanted to make sure you were aware of. I personally have not worked with that much, and not recently, but you will need t master it if you want to do as you propose. There are some posts here from 2 or 3 years ago that you may wish to search for.

Why not use the normal 3/1 or 5% gateway rules since you have the SHNEC to work with?

[Guest acmtpa]

AndyH. Thank you for your replys.

With only a three-fold difference in allocation rates between the owner (age 52) and employees (age 24), I cannot give a large enough contribution to the owner without giving away too much to the employees. The 5% gateway contribution would give away too much to the employees. As I have put it together, the employees get about 3.5% of pay, and the owner gets almost 14%. The age-based schedule works well here, because of the large age difference.