New Plan Design Help

[Guest lmccormick]

We are looking to switch from a SIMPLE IRA to a 401K plan for the upcoming year. We have several highly paid employees (upwards of 200K or more). I am hoping to benefit the lower paid employees while limiting the employer's match to the highly paid employees so they aren't anymore than they are now which is a dollar for dollar match up to 3% of salary. So an employee who currently earns 75K a year who maxes out their SIMPLE contributions only gets an employer match of $2250 while the employee earning 200K who does the same gets a match of $6000.

Could we design the plan to offer a 5% match up to $5000 and then a 2% match thereafter? So an employee who now earns 75K would get a match of $3750 (5% of 75K) and the employee earning 200K would get: $5000 plus $2000 for a total of $7000 in matching funds. This benefits both employees as the one earning less than 100K gets a 5% match instead of the former 3% under the Simple plan and the 200K employee is actually now getting a 3.5% match.

Is this doable or what is a better suggestion to acheive this goal?

Lisa

[Mike Preston]

There is no restriction on offering a less generous match to HCE's. Hence, you can retain your 3% match to HCE's and improve your match to NHCE's as you see fit.

[david rigby]

While Mike's comment is (as usual) correct, the original post raises questions

- what is the goal?

- why favor NHCEs over HCEs?

The design presented is not the most common. Is there something else going on here? Would the HCEs like to be able to defer larger amounts?

[Guest lmccormick]

While Mike's comment is (as usual) correct, the original post raises questions

- what is the goal?

- why favor NHCEs over HCEs?

The design presented is not the most common. Is there something else going on here? Would the HCEs like to be able to defer larger amounts?

Why favor NHCEs over HCEs? Well maybe because they're compensated less and for that reason alone it makes it harder for them to defer the compensation in the first place. Why do lower income folks pay less taxes? Think of it along those lines. The goal? The goal is to allow the lower paid employees a larger match without the employer having to fork over even more for the HCEs than they already do. You can just about bet where the larger participation is.

Now as to your last question....I don't quite understand it. All employees have a maximum amount they may contribute to their 401K each year so I'm confused by the last question. Can you clarify?

[Guest lmccormick]

There is no restriction on offering a less generous match to HCE's. Hence, you can retain your 3% match to HCE's and improve your match to NHCE's as you see fit.

Mike,

Thank you for your response. As the topic is somewhat new to me I want to make sure I am understanding your answer. Are you saying that we can design our plan to offer different matching amounts to NHCEs? Do we define in the plan what constitutes a HCEs? Could it be as simple as matching 5% of the salary of everyone earning less than 100K and 3% for those who earn more? This would be the perfect solution.

Lisa

[Mike Preston]

Are you saying that we can design our plan to offer different matching amounts to NHCEs?

Absolutely.

Do we define in the plan what constitutes a HCEs?

Already in the plan (it is a requirement of all 401(k) plans).

Could it be as simple as matching 5% of the salary of everyone earning less than 100K and 3% for those who earn more? This would be the perfect solution.

Not quite. The HCE determination is made with respect to what people made LAST YEAR, not this year. There is an exception for 5% owners, but I'm ignoring that for now. Hence, you say that HCE's get a 3% match and NHCE's get a 5% match. As long as the HCE's get less (as a percentage of pay), it will certainly pass all of the non-discrimination tests.

If I can take a liberty and answer for David, what he is getting at is that usually employers want to increase matching percentages for NHCEs so that their HCEs are allowed to defer more money into the plan. That is, if the ADP test is failing, an employer might increase the match in an attempt to get more NHCE's to contribute which would then cause future ADP tests not to fail.

In your case, however, I sense that the ADP test is irrelevant and you are looking for a way to increase benefits to rank-and-file employees without it causing an uptick in the expense for the employer with respect to the HCE's.

That is easily doable.

We normally deal with the reverse: plan sponsors that wish to increase the benefits for HCE's and who specifically do not wish to cause the additional benefits provided to their HCE's to require them to contribute more on behalf of their NHCE's.

[Guest lmccormick]

If I can take a liberty and answer for David, what he is getting at is that usually employers want to increase matching percentages for NHCEs so that their HCEs are allowed to defer more money into the plan. That is, if the ADP test is failing, an employer might increase the match in an attempt to get more NHCE's to contribute which would then cause future ADP tests not to fail.

In your case, however, I sense that the ADP test is irrelevant and you are looking for a way to increase benefits to rank-and-file employees without it causing an uptick in the expense for the employer with respect to the HCE's.

That is easily doable.

We normally deal with the reverse: plan sponsors that wish to increase the benefits for HCE's and who specifically do not wish to cause the additional benefits provided to their HCE's to require them to contribute more on behalf of their NHCE's.

Great senses! That's exactly what we were hoping to acheive. I'm sad to hear it's so far off from the "norm". Not only are our HCEs very well compensated they are working overseas and a chunk of their earnings are federal tax free as well. Since you seem to understand what we're looking to acheive can you make a recommendation as to how it should be stated? Currently everyone gets a 3% (of salary) match under our SIMPLE-IRA. I don't want the HCEs to lose this. I just would like to increase the amount for the NHCEs without having to pay the same to the HCEs who are already costing quite a bit.

Lisa

[Mike Preston]

I'm not sure what you mean by "how it should be stated". Do you mean how should the document be drafted to accomplish what you want? If so, the answer is document dependent. Suffice it to say that any document provider should be able to tell you how, if at all, they can implement a provision which calls for a matching contribution for HCE's to be defined independently of a matching contribution for NHCE's. Some document providers will be able to accomodate this, some won't. If you are having your document drafted by an attorney, it is as simple as saying to that attorney that you want to have provisions in your plan that implement separate matching rules for HCE's and NHCE's.

[Guest lmccormick]

I'm not sure what you mean by "how it should be stated". Do you mean how should the document be drafted to accomplish what you want? If so, the answer is document dependent. Suffice it to say that any document provider should be able to tell you how, if at all, they can implement a provision which calls for a matching contribution for HCE's to be defined independently of a matching contribution for NHCE's. Some document providers will be able to accomodate this, some won't. If you are having your document drafted by an attorney, it is as simple as saying to that attorney that you want to have provisions in your plan that implement separate matching rules for HCE's and NHCE's.

That's what I meant. We are having the plan documents drafted by an administrator. I was just hoping to sound more like I knew what I was talking about/asking before explaining to them in more detail as to what my objective was. Thank you for the advice/feedback.

[Mike Preston]

Great. You should be all set.