Cross tested safe harbor etc....

[pmacduff]

I think I know the answer, but I need some reinforcement today...

YOS eligibility, dual entry dates, safe harbor 401(k) plan, Employer makes safe harbor match contribution. Plan is top heavy. When the Employer does make a discretionary profit share it is a cross-tested formula.

There are 2 family owned Hotels (A & B), different Employers, EIN, etc., but controlled group. All owners and HCEs are with Hotel A. Hotel B employees are allowed to defer and receive safe harbor match, but are excluded from the cross-tested profit share allocation.

Profit share passes coverage. However because the plan is top heavy, the Hotel B employees who are not contributing and those not receiving at least a 3.0% match rate will need to receive at least 3%, correct?

The Employer does not want to give ANY profit share allocation to the Hotel B employees, but I did tell them last year that in a year that they make a profit share or there are reallocated forfeitures, top heavy contributions would be necessary for the Hotel B eligible employees.

[Mike Preston]

Why aren't B's participants in a separate plan?

[pmacduff]

client does not want the expense of maintaining 2 plans...

the top heavy due for Hotel B would be minimal as there is only 1 employee not contributing that would need to receive the 3%. (All other Hotel B employees who are deferring are contributing enough to receive the full 4% SH match).

[Mike Preston]

Me thinks the gateway will cause an increase to both.

[pmacduff]

the owner group is receiving an 11.0% allocation, so the Hotel A staff employees are receiving 1/3 of that or 3.67%.

so...even if the eligible Hotel B employees are specificaly excluded by definition from profit share allocations in the plan doc, they all need to receive 3.67% of profit share due to the gateway rules?

[Kimberly S]

If a participant receives a contribution (even top heavy minimum) it triggers the need for the gateway.

[Mike Preston]

I agree with Kim.

[ak2ary]

But the SH matching contribution does not trigger the gateway.

Only the profit sharing contribution will trigger the gateway.

So, not all Hotel B employees will be required to receive a gateway contribution since they do not benefit under the profit sharing plan.

Only the one Hotel B staff person receiving the 3% TH contribution under the PS will be forced to increase to 3.67% to satisfy the gateway

[pmacduff]

so...the plan can allocate 3.67% to the one Hotel B participant and be done? COOL...everyone agree?

As it happens this one Hotel B employee decreased his hours and is now working less than 1000 each plan year. He only had 1 YOS over 1000, with a 2/20 vesting sch, so at this point he is 0% vested in the PS anyway! Gotta love it!!!!

[Mike Preston]

Agreed from my end.

[pmacduff]

ok - same client is being audited for 05/06 PY (off calendar). Bad census data has contributed to some issues w/ regard to the audit and specifically the 401a discrim testing. Ultimately I am "redoing" much of the testing and reports so that all are accurate. Based upon the following census data, can anyone think of a way to help this pass? Plan coverage passes. However there is one HCE rate group (the 49 year-old) that is failing, everything else is good so I'm trying to see what I can do. The NHCEs received 5.366% and the HCEs received 7.366%.

3 HCEs:

Age 49 401(a) eBAR = 3.244

Age 61 401(a) eBAR = 1.219

Age 63 401(a) eBAR = 1.035

10 NHCEs

Age 48 eBAR = 2.564

59 = 1.045

55 = 1.449

26 = 15.429

44 = 3.554

48 = 2.564

51 = 2.008

56 = 1.335

52 = 1.85

47 = 2.782

Thanks in advance, it's been a LONG week!

[Mike Preston]

How is it failing? Doesn't the plan easily pass the ABT?

[pmacduff]

Mike - I use Relius. The nondiscrim tests show the ABT failing. Also failing the ratio percentage test and the rate group coverage tests.

[Mike Preston]

I am at a loss to understand how the ABT is failing. Have you checked their numbers by hand? Even just multiplying the HCE's percentage by .7 you get a number which is less than what the NHCE's got, so it passes on a contributions basis. Something must be going on here that you haven't let us know.

[pmacduff]

ok - this is a 401(k) plan with safe harbor match and cross tested discretionary PS. Not sure why, but Relius is using all allocations in the ABT, deferrals, Sh match and profit share. But not for all; even among the 3 HCEs, the amount reflected on the ABT report is not consistant?!?! The ABT should include only non-electives.

Something must be wrong in the specs, account set up, ee data. I've never noticed this issue with Relius for other clients.

I'm going to go through everything on Monday and see what I can find.

[Mike Preston]

They are correct to include all contribution types in the ABT, so it is certainly possible that the plan doesn't satisfy the ABT. But I'd test it on all possible scenarios before giving up: annual with permitted disparity, accrued to date, etc., etc. These are not for the weak-kneed amongst us, of course, as there is a lot of work to get some of those tests correct (in terms of collection of data we might not otherwise have available easily).

It also looks like your actual test is not using permitted disparity (can't be sure, but it looks that way). You might want to check.

And it looks to me like a simple test on the basis of contributions with permitted disparity is likely to pass, but I would need to see salaries to confirm.

If all else fails and you have a rate group that fails, all you can do is provide bigger benefits in the form of a retroactive amendment to make it work.

[Tom Poje]

you have 10 nhce and 3 hce, so nhce concentration is 10/13 = 76.xxxxxxx always round down - so you have 76%. this equals a midpoint of 33%.

this means you need 4 NHCEs in the rate group (4/10 > 33%)

you have some big problems with a 49 year old hce and the 4 closest nhces are

26, 44, 47 and 48.

This means you only have a 1 year difference - maybe a 2 year difference in age (depending on age definition 'nearest' or 'last' between the 'oldest' of the NHCEs in the group.

since the max interest rate is 8.5%

and based on a 1 year age difference, at very best the HCE can receive 1.085 times more than the NHCE. (if testing on current accrual.

imputing disparity will help some

(2.564 * 1.085) = 2.782

2.782 + .65 (max disparity) = 3.432

hce is at 3.244, but the HCE will also get some disparity added, while most likely less than .65, without knowing the comp, would guess around .45. thus you will still fail, even if avg ben % test passes.

if hce is born in the first half of the year and the NHCE is born in the second half of the year then it is possible the ages will be 47 and 49 instead of 48 and 49 - then you might have a chance of passing, but based on the info provided this plan will fail on current accrual testing.

[pmacduff]

Thanks Tom & Mike for all the input.

Yes- the 49 yr old is messing everything up. All HCE employees deferred close to the max due to the safe harbor, so the ABT will not pass. The ratio percentages pass for the rate groups with the 2 older HCEs, but the 49 year old only has 2 NHCEs in that group and fails. (2/10 over 1/3). It strikes me that this plan is only giving the HCEs 2% more than the NHCEs, but due to the ages, etc. can't pass the testing.

Mike, you're correct, the original test was not using permitted disparity. I tried running the testing imputing disparity, but as Tom mentioned, the change was minimal and the results the same, the 49 year-old HCE rate group still doesn't pass.

The auditor has been very helpful working with us on this, so hopefully we can the client through this and move on!

Thanks again.

[Tom Poje]

what happens if you test on an allocation basis (and impute disparity)?

[pmacduff]

everything fails if I test on allocations (even if I impute disparity).

I found that if I bump the staff employees profit share up to 6.3% from 5.366%, that adds the 1 NHCE to the ratio percentage group of the 49 yr old and it passes (3/10 over 1/3). That's about 1% additional for the Employer to contribute (plus gains).

[Mike Preston]

I don't understand why testing on contributions with permitted disparity fails. Can you post those numbers? Will need the salaries to confirm.

[pmacduff]

Here are the salaries and alloc.:

3 HCEs: Comp Total Alloc. 401a alloc

Age 49 401(a) eBAR = 3.244 $50982 $20144 $3755

Age 61 401(a) eBAR = 1.219 $33988 $18863 $2504

Age 63 401(a) eBAR = 1.035 $53106 $21036 $3912

10 NHCEs

Age 48 eBAR = 2.564 $8353 $1070 $448

59 = 1.045 $3640 $195 $195

55 = 1.449 $8988 $482 $482

26 = 15.429 $14958 $1260 $803

44 = 3.554 $21480 $2013 $1153

48 = 2.564 $5192 $438 $279

51 = 2.008 $46167 $5822 $2477

56 = 1.335 $18438 $2649 $989

52 = 1.85 $24109 $3234 $1294

47 = 2.782 $26350 $1717 $1414

[Tom Poje]

no wonder imputing disparity doesn't help. the HCEs have comp less than the taxable wage base/and or covered comp limit

[pmacduff]

True. Do you see any way this can pass as is?

[Mike Preston]

Since the HCE's do not make more than the social security integration threshold, permitted disparity won't get you anything. Oh, well.

Since the 48 year old makes so little, a corrective contribution of about $75 will make the test pass. Is that an option? If so, do that and be done with this.

If you can't make that kind of corrective contribution, or would prefer not to, add the following information:

Account balance at end of year (including allocated earnings, if any).

Date of participation

Date of hire

Salaries for the two plan years immediately before this plan year.

That should provide enough info to see whether any sort of restructuring will work.

Maybe.

[pmacduff]

Thanks again Mike. Yes, simplest, easiest solution & I'm all for it; I think the client will be too.

This is the 2nd audit within 5 years and the 3rd within 10 for this particular client. Priors went well, but the plan didn't have the 401(k)/SH/Cross tested piece (used to be a straight PS plan).

I can't wait to be through this......

[pmacduff]

Ok - my Relius software produces a report called "Average Benefits Percentage Test Under 410(b) Tested by Annual Accrual Method Without Permitted Disparity" (whew!) Anyway, this is the test that is including ALL employee and employer contributions for the plan year.

I have been reading through the 410(b) reg. section (see below) and am confused by the bold underline section as it appears to say that you disregard employee contributions.

Can anyone point me to where in the regs it defines all types of contributions to be used for the ABT?

Sec. 1.410(b)-5 Average benefit percentage test

--------------------------------------------------------------------------------

(a) General rule. A plan satisfies the average benefit percentage test of this section for a plan year if and only if the average benefit percentage of the plan for the plan year is at least 70 percent. A plan is deemed to satisfy this requirement if it satisfies paragraph (f) of this section for the plan year.

(b) Determination of average benefit percentage. The average benefit percentage of a plan for a plan year is the percentage determined by dividing the actual benefit percentage of the nonhighly compensated employees in plans in the testing group for the testing period that includes the plan year by the actual benefit percentage of the highly compensated employees in plans in the testing group for that testing period. See paragraph (d)(3)(ii) of this section for the definition of testing period.

© Determination of actual benefit percentage. The actual benefit percentage of a group of employees for a testing period is the average of the employee benefit percentages, calculated separately with respect to each of the employees in the group for the testing period. All nonexcludable employees of the employer are taken into account for this purpose, even if they are not benefiting under any plan that is taken into account.

(d) Determination of employee benefit percentages—(1) Overview. This paragraph (d) provides rules for determining employee benefit percentages. See paragraph (e) of this section for alternative methods for determining employee benefit percentages.

(2) Employee contributions and employee-provided benefits disregarded. Only employer-provided contributions and benefits are taken into account in determining employee benefit percentages. Therefore, employee contributions (including both employee contributions allocated to separate accounts and employee contributions not allocated to separate accounts), and benefits derived from such contributions, are not taken into account in determining employee benefit percentages.

[Guest merlin]

1.410(b)-7(e). Have fun trying to figure out the disregarding of the otherwise disregardables. But it's all there.

[pmacduff]

Thanks Merlin.

[Tom Poje]

employee contributions are after tax contributions (not to be confused with employee contributions which are deferrals which in the eyes of the government aren't really employee contributions but rather employer contributions.)

[pmacduff]

Thanks too Tom. Working with this IRS auditor, there have been times I can't see the forest for the trees. I wasn't thinking of the "employer" aspect attributed to the 401(k) deferrals.

There is an employee in the ABT who did not make any 401(k) contributions or receive match and was not eligible for the ps (worked 85 hours in the py and termed). He has a 0.00 ebar in the ABT of course and the auditor was thinking he shouldn't be showing in the test at all. But since he was eligible to make 401(k) deferrals and simply opted out, he should be there.

As a side note, although ROTH contributions are after tax, they are still "elective deferrals", so I assume that they would be in the same category?

[Mike Preston]

I would think so.

[Tom Poje]

yes. the nearest I can find to anything is in the code 402(e)(3) which says deferrals 'contributions made by an employer on behalf of an employee...' and 'not treated as contributions made to the trust by employees..."