Exclude HCE's from SHNEC for flexibility

[Jim Chad]

When I restate for EGTRRA, I was considering excluding HCE's from SHNEC and giving them a discretionary non elective. This would allow the owners to skip their 3% in bad years.

Am I right in thinking this would eliminate the Top Heavy Exemption? If this is correct, I would not be able to exclude comp prior to entry for the 3% SHNEC., in years the Plan is Top Heavy.

[SheilaD]

I've wondered if you can exclude key HCE's only from the safe harbor. This would allow you to get the top heavy to the non-owner HCE's without breaking out of safe harbor. I haven't found an definintive answer on whether this is possible.

[Jim Chad]

Sheila, I think you can do what you are suggesting as long as you pass coverage. What I think would break you out of safe harbor would be giving the 3% discretionary non elective to the HCE's.

[Jim Chad]

I meant to say that I thought the 3% discretionary non elective will cause the Plan to lose the Top Heavy Exemption.

[BG5150]

I think you would have a problem giving only the HCE's a profit sharing contribution and not the NHCE's even though the latter is receiving a 3% allocation. It would be a separate contribution that definitely discriminates in favour of HCE's!

[Blinky the 3-eyed Fish]

I think you would have a problem giving only the HCE's a profit sharing contribution and not the NHCE's even though the latter is receiving a 3% allocation. It would be a separate contribution that definitely discriminates in favour of HCE's!

Two questions:

1) How would it be discriminatory?

2) Are you British?

[PLAN MAN]

Under the 401(k) safe harbor rules a 401(k) plan automatically satisfies the ADP and ACP tests if the employer makes nonelective contributions to the accounts of non-highly compensated employees in an amount equal to 3% of their compensation. If desired, nonelective contributions need not be made on behalf of highly compensated employees. If no other contributions are made (or forfeitures allocated) then the plan is not subject to the top heavy rules.

In the plan years in which a contribution other than the safe harbor contribution is made, the plan would be subject to the top heavy rules. If the plan has a discretionary contribution that is allocated only to HCEs, I would think some kind of nondiscrimination testing would be required.

[Tom Poje]

I'd agree with Blinky on this one. since SHNECs can perform triple duty, it wouldn't appear to be a problem if the HCEs 3% was a nonelective and the NHCEs was a 3% SHNEC. As far as I know, there is no rule like QNECs in which you have to run a nondiscrim test with and without QNECs.

Such a contribution would of course take the plan out of the top heavy free scenario, but since most if not all employees would receive the 3% SHNEC anyway it probably doesn't matter

[SheilaD]

My reading of the first post was that keeping the top heavy exemption is important so as to exclude pre-participation compensation. If you provide the 3% safe harbor to NHCE's only - then you have the top heavy exemption, do not have to give the 3% to non-key HCE's, and can exclude the pre-participation.

It seems that the goal of the first post is to give the non-key HCE's the 3% as well. If that is the goal, then limiting the safe harbor to NHCE's and non-key HCE's should do it.

[BG5150]

I think you would have a problem giving only the HCE's a profit sharing contribution and not the NHCE's even though the latter is receiving a 3% allocation. It would be a separate contribution that definitely discriminates in favour of HCE's!

Two questions:

1) How would it be discriminatory?

2) Are you British?

1. I would think if only HCE's received a Profit Sharing contribution it would be discriminatory.

2. Nope.

[Blinky the 3-eyed Fish]

1. I would think if only HCE's received a Profit Sharing contribution it would be discriminatory.

2. Nope.

1. See Tom's explanation as to why it's not.

2. Favour?

[BG5150]

1. Sometimes I just don't think.

2. Sometimes I spell like that. Behaviour. Neighbour. Colour. Grey. I'm a whack-o.

(But an ENGAGED whack-o! Popped the question this weekend; she said YES!)

[Jim Chad]

BG5150 CONGRATULATIONS!! Wish you all the happiness in the world.

[Jim Chad]

Thank you for everyone who added to this thread. I am going to summarize what You all helped me come up with.

If I want to exclude comp prior to entry for the 3% SHNEC, I cannot exclude HCE's from SHNEC and fill in with a discretionary non - elective. So I have to decide when the flexibility is important enough to give up something the client almost always seems to want.

I am definitely going to put this in all of my cross tested plans. I'm probably giving up nothing and I have once had the problem of a 23 year old son coming into the Plan. The 3% SHNEC gave him a huge EBAR. Excluding HCE's will give me the flexibility I need to deal with this.

Thanks again for all of the help.