Testing of Nonelective seperate from SHNEC

[Jim Chad]

I think Relius may not be telling me everything I need to know when testing a 401(k) Plan with a 3% SHNEC and a 5% profit sharing with permitted disparity and a last day requirement.

The coverage test tells me everyone benefited for 401(a). This is correct because everyone received the Safe Harbor contribution. But some people with more than 500 hours did not recieve the discretionary nonelective contribtuion. I have a prototype document so in theory I should have a design based safe harbor for nondiscrim.

Do I need to test the discretionary nonelective for coverage seperately or do I need to test the whole 401(a) contrib for nondiscrim? Or am I just making things more difficult than they need to be?

What report is best for this?

[Guest Derrin Watson]

I can't comment about Relius Administration reports, in large measure because that's not my area. I'd recommending contacting Relius technical support directly.

What I can talk about is the nondiscrimination testing issue.

It is true that everyone benefited. It is also true that this is not a uniform allocation safe harbor plan. All the employer contributions you described are included in 401(a)(4) testing, and because of differing allocation conditions some are receiving different amounts than others even after taking permitted disparity into account. You can either restructure or run the general test. Restructuring frequentlly works well in this situation. So long as you can pass coverage looking only at those who just get the 3%, and you can pass coverage looking only at those who also get the regular allocation, you're good to go.

The situation you've described is one that could happen even in a standardized plan, where one is supposed to have virtually absolute reliance on the document for 401(a)(4) in operation. IRS officials have admitted in ASPPA Q&A sessions that this is an issue.

The question is, if you have reliance, do you really have reliance? I'd say yes. It isn't your fault that the IRS may have given you that reliance without thinking through all of the possibilities.

I should note that I am making this comment in my individual capacity, and not on behalf of Relius, and nobody else at Relius has reviewed my comment.

[Bird]

Good question and good answer. It just came up in our office. I'll try to expand a bit.

If you have 10 NHCEs and 1 HCE, and everyone gets a SHNE, you pass 410(b) coverage at 100%. For nondiscrimination under 401(a)(4), if not everyone who got the SHNE got the PS, then it's not a uniform allocation and you can't rely on it being a 401(a)(4) safe harbor uniform allocation.

Let's assume the HCE and 7 NHCEs got PS. You can run a general test on the combined contributions, and if you used the maximum permitted disparity in your PS formula, and imputed permitted disparity in your testing, the rate group for the HCE will wind up at 70% and you will pass on a general test basis. The problem we ran into was that our PD formula used 5.4% and 81% of the TWB, and when we imputed PD in the general test, using 5.7%, the HCE's adjusted allocation rate was a bit higher than the NHCEs' and it didn't pass the general test (if that doesn't sound right I'd like to hear comments).

But, as noted, you can restructure under 401(a)(4), which looks back to 410(b) for coverage - the 3 NHCEs who got SH only are in one group; no HCEs so it passes coverage. The other group has everyone who got both contributions, and it includes 70% of the NHCEs, so it passes coverage. And the formula of the combined SH plus PS meets the permitted disparity safe harbor, so all is well.

[Jim Chad]

Derrin and Bird - Thank you for confirming that I was on the right track. I have a call in to Relius support asking what reports they have to help me find which HCE's and which NHCE's get only SHNEC and which people get both. For those viewers who are interested, I will post what they come up with.

Thanks again.

[Tom Poje]

there are of course a variety of ways to generate a report.

you could tell the nondiscrim to test on an allocation basis to see who gets 3% and who gets more.

attached is a crystal report that will split out the SHNEC from other ps contributions with a big caveat of course.

I identify all my SHNEC accouts beginning with account number 800.

If you have a partial understanding of crystal you could easily modify the 2 fields indicating the account number.

you cant miss them in this report, though supressed they are the fields in super large size compared to everything else

[Jim Chad]

Derrin:

Would a standardized prototype always pass testing because everyone who did not receive the discretionary nonelective be excludable because of less than 500 hours?

[Jim Chad]

Thanks, Tom. What version of Relius is the report currently on?

[Tom Poje]

we just switched to 12 a month or so ago.

[Jim Chad]

I have been trying several ways to approach this. One that seems to be giving me the correct answer is to rate group test on an allocation basis. .....with imputed disparity.

Does anyone see anything that Relius does not handle correctly?