Defined Contribution Plan with Cross-testing

[Guest fender5150]

I'm new to cross-testing and as they say, if you never ask, you'll never know.

As a way of understanding what I've read so far; does this sound like a scenario that would pass?

-DC plan with a 3% NEC - Therefore a Safe Harbor plan, but also a plan that is not subject to a top heavy minimum.

-Eligable owners (5% or more) who are at least 35 years old get a discretionary contribution of up to 6% of eligable compensation. 3% plus 6% = 9%. The group rates tier from 0 to 6%, which could be problematic, but since the NEC for NHCEs is 1/3 of the highest groups %, this shouldn't be a problem, right?

Could it a plan this simple work in your opinion?

Thanks,

Fender

401ktest.com

[Tom Poje]

if you are asking can you alocate 3% shnec to all and an additional 6% to the owners (giving them a total of 9%), yes, that would satisfy the gatewat minimum (1/3 of 9% = 3%)

this gives you the right to cross-test, but does not mean you pass nondiscrimination.

as for top-heavy, there is no free ride once additional contributions are made, so you would have to test for that as well. since 3% is being provided that shouldn't be a problem, unless the SCHEC was given from date of entry.

[Guest fender5150]

You taught on this at last year's conference: I recognized your name after I saw the acronym SHNEC:

Regarding the ACP test:

If there are other HCE's who are not eligable for the 6% contribution, I would stand a passing this test, Correct? IE: The SHNEC helps with the Gateway Provision, but not with the ACP test.

Regarding the Top-Heavy test:

I thought the 3% NEC eliminated the need for Top-Heavy testing. I understand that the additional contribution means there's no longer a safe harbor for the ACP.

Thanks again for looking this scenario over!

This is complicated stuff; and I'm sure I'm only scratching the surface.

[Guest Dash02]

As Tom said, giving every NHCE at least 1/3 the allocation rate received by the HCE with the highest allocation rate only gets you in the door to be allowed to cross-test for discrimination. Cross-testing generally involves a two prong test which involves calculating an EBAR for each nonexcludable employee and comparing the EBARS of HCEs versus the EBARS of NHCEs. In general, an EBAR is caculated by future valueing what the dollars currently allocated to an employee will grow to become at normal retirement age (e.g., age 65) assuming 8.5% growth. You then divide this future value amount by current year compensation.

Be advised that in order to to have a safe harbor 401(k) plan for the year, the plan document must provide for it and a written notice has to be provided to the participants that, among other things, has to state that a 3% SHNEC will be made on behalf of every NHCE (and HCEs if desired). This notice must generally be provided by December 1 of the year prior to which the SHNECs will be made.

I'm an Ohioan as well. Contact me at innract@hotmail.com if you have questions.

[austin3515]

Fender5150: Your dabbling in the most complicated area of DC administration, and it is clear from you posts that you are at a very early stage in your retirement plan career. Note that I am not judging your intelligence but your experience, so I hope you won't be insulted. Hopefully, you are working with someone more familiar with these rules because it is very easy to "crash and burn." And you won't know you crashed and burned until your client gets audited.

But at any rate:

1) Cross-testing an allocation in no way shape or form affects the exemption from the ADP test provided by the 3% SHNEC. If you provide the SHNEC, no ADP test (you mentioned ACP test which, wit no matching or after-tax contributions never comes into play).

2) A plan that provides the 3% SHNEC is only exempt from the top-heavy rules IF the only employer contributions under the plan are the 3% SHNEC itself. So if there are profit sharing contributions or reallocated forfeitures, then the top-heavy exemption is blown. As Tom already mentioned, this point is moo (like a cow's opinion!) if the Plan uses full year pay in a participant's initial year of participation.

[Guest fender5150]

Don't worry about hurting my feelings. If I get the information I want, I won't care about any written insult that might come with it. I haven't seen an insult yet.

Austin: When I read your posts I hear Mike Myers character in my head, so keep them coming!

Oh yes; this is all very new new for me. And I'm becomming more and more aware just how complicated it is.

Please also don't be insulted when I question your answers. I just don't want to miss something.

Regarding Top-heavy plans - Once again: Isn't one remedy for a top heavy plan a 3% QNEC? And wouldn't the 3% SHNEC satisfy that requirement?

[BG5150]

Once again: Isn't one remedy for a top heavy plan a 3% QNEC? And wouldn't the 3% SHNEC satisfy that requirement?

It would as long as full-year compensation is used for the calculation. Many plans use participation compensation (money they've made only for the portion of the year they were actual participants) to determine the ER's allocation.

[Mike Preston]

...and some plans provide SHNEC's only to NHCE's and some (admittedly most) plans provide QNEC's only to NHCE's, so if you have a non-key HCE your plan goes toes up. Remember, the plan as a whole is exempt from TH only if there aren't other contributions, which there are, because if you are doing new comp, your whole purpose is to allow those other contributions.

On a more practical note, top heavy just isn't a concern. If your intent is to provide a new comp allocation you will frequently have a required gateway contribution that satisfies TH.

[John Feldt ERPA CPC QPA]

-DC plan with a 3% NEC - Therefore a Safe Harbor plan, ...

-Eligable owners (5% or more) who are at least 35 years old

First, just to clarify, if you are relying on the Safe Harbor provisions to get the free pass on the ADP and ACP test, the plan needs to do more than just give a 3% NEC, the plan must adopt the Safe Harbor provisions and provide a SHNEC. You probably got that already.

Also, if you have a classification that uses age somehow in its definition, I'm a little uneasy. At a conference or seminar a while back (I cannot remember when), this was viewed as violating something. Maybe another commentator can tell me I'm wrong, or they can shed more light on this.

[J Simmons]

The age parameter would concern me if in design or use it resulted in those under age 40 receiving more than those over age 40. ADEA.

[austin3515]

In the world of New Comparability, the only reason you would break groups down by age would be to provide the older workers with more than the younger workers because it's the younger workers that louse up the testing.

In other words putting people above 35 in one category and those below in another would "never" be done to give more to the younger employees than to the older ones.

Though I guess one should never say never, so perhaps the point is well taken...

[John Feldt ERPA CPC QPA]

Yep, that was it. We had a plan where the owner-father wanted no more contributions, but the kids did - and thus the ADEA issue. The plan had been using age within its class definitions, up until that point.

Thanks!