DB/DC Combo plan, general test

[John Feldt ERPA CPC QPA]

Okay, we are looking at the general test. The plans cover a fairly large number of NHCEs and let's say 3 HCEs (2 owners and an owner's child). On the DC side, all 3 HCEs are eligible. The owner's child is eligible but does not defer, is excluded from the safe harbor allocation, and is in a classification that receives no profit sharing allocation. The DB plan is arranged to provide 0.50% to the NHCEs, zero accrual to the owner's child, and a larger accrual rate for the owners.

If we count this owner's child in the test, we divide by 3 HCEs then our average benefit percentage looks good and we can pass. If for some reason we cannot, then the test fails.

I think this HCE child gets counted so we can divide by 3, but a recent conversation with another actuary has me in doubt.

This HCE has zero benefit in both plans, can we count them in the general test for our HCE count?

[Tom Poje]

lets suppose the person in question was simply an HCE and not even related or anything.

if he met the eligibility requirements, but was excluded from the plan how would you treat him?

hopefully as a 0 for the avg ben % test. [you'd do the same with an NHCE that was excluded, it is just that excluding an HCE helps testing] so I don't see how the situation changes (possibly if he was a 'short service' employee I could see the IRS gripe - they already said you shouldn't be giving NHCEs like that something to pass testing, so I'd hold the reverse is true about not giving a short term HCE anyting just to pass testing could fall into the same boat)

what reasons were given for not inclding this individual in the testing?

[John Feldt ERPA CPC QPA]

I agree, that's how it should be done. Of course, in this business we have to watch out for unusual interpretations that get made by officials from time-to-time. What makes sense now, well, anyway...

This actuary stated they would be more comfortable if the HCE had some small amount of benefit in one of the plans, just not being entirely comfortable otherwise, no other reason cited. Perhaps since the child was not working a lot of hours was another concern (but the plan was installed in a way that all employees entered when the plan when it was established).

[ak2ary]

Small amounts of benefits to owners children have a way of messin stuff up

[jpod]

My antenna went up by your continued use of the word "child," as opposed to "adult daughter" or "adult son."

Regardless of the age of the offspring, there are completely legitimate situations where the child of an owner actually does some real work for the employer, whether full time or part time, and gets paid for that work at a rate that is sensible. Then again, there are other situations where the offspring, regardless of age, is paid some money that is reported on a W-2 for the sole purpose of having another HCE in the census, but the child does not provide any service for the employer. It can be well worth the extra FICA/Medicare tax, workers' comp. premiums, etc., to syphon off some of the parent's compensation to the child if that gets you significantly greater flexibility in your general testing or coverage testing. Certainly the latter situation is susceptible to challenge in connection with an examination of the plan.

[John Feldt ERPA CPC QPA]

Thanks, jpod, we are aware of this. I almost used the word "kid", but figured AndyH or WDIK would not be able to resist the temptation to make a goat comment.

This is an adult child actually doing some legitimate work. The only item in question might be the reasonableness of the amount paid for that work. Since they are getting a zero in their numerator, the denominator (the compensation) won't affect us, and we leave that to their CPA.

[AndyH]

Geez.

Tom (P), you must have a few goat jokes or goat-a-grams you've been waiting to use, no?

The correct technical answer is that if the kid looks like the one on the AFLAC commercial then he is statutorily excludable.