Small Employer Plan Design Proposal

[Gary]

An owner of a small company says he wants a retirement plan with a large amount going to him and as little as possible to his employees.

Below is the story and any observations would be appreciated.

Company: One owner and 13 other employees

HCEs: One owner and 3 other employees

Plan proposal: Combined DB/ 401(k) 3% safe harbor plan

Both plans exclude the 3 HCEs.

401(k) plan includes only 2 NHCEs and passes ND on its own as follows:

Coverage:

NHCE % = 2/9 = .22

HCE % = 1/4 = .25

Passes ratio test

ND:

HCE accrual = 2.4%

One NHCE > 2.4%

Ratio = 1/9 divided by 1/4 = .44

NHCE concentration = 9/13 = 69%, thus mid point = 38.25% and safe harbor = 43.25%

HCE ABP accrual = 3.08% (combining PS contribution, DB accrual, 401(k) deferral, and 3% safe harbor)

NHCE ABP accrual = 4.3%

Passes ABT

DB plan includes 5 NHCEs and the owner and passes ND on its own as follows:

Participation:

6/13 = 46%

Passes 40% test

Coverage:

NHCE % = 5/9 = .56

HCE % = 1/4 = .25

Passes ratio test

ND:

HCE accrual = 8%

one NHCE accrual =8%

Ratio = 1/9 divided by 1/4 = .44

NHCE concentration = 9/13 = 69%, thus mid point = 38.25% and safe harbor = 43.25%

HCE ABP accrual = 3.08% (combining PS contribution, DB accrual, 401(k) deferral, and 3% safe harbor)

NHCE ABP accrual = 4.3%

Passes ABT

As a result it appears that both plans are in compliance and provides a significant amount to the owner and little to the employees.

It seems that it might be best to assign employee groups or classes to avoid the need to specify employees by name in the plan document.

Any observations from a practical perspective regarding the above analysis and its credibility would be appreciated.

Thank you.

[mwyatt]

Great the first year, but what happens when one covered employee leaves or non-covered employee is hired?

[Gary]

Review the demographics in the second year and if necessary amend the plan to include an additional employee or as many as needed to pass the tests.

Thanks.

[AndyH]

Any time you can give 3/4 HCEs zilch you should be able to work wonders. But happens when they want to be dealt in?

[Jim Norman]

Didn't see, did you check the 404 25% limit?

Who are the excluded HCEs? If family or otherwise "friendly", OK. If they are the company management, and they are excluded from benefits that their direct reports get, may create unfortunate "personnel issues".