No Highly Compensated Employees in 401(k) Plan?

[Guest PAM]

I have a small client with a 401(k) plan. The 100% owner retired back in 1994. Her son is the President of the co. now with no ownership. For 1998, he is the only employee who deferred any salary into the plan. With Family Aggregation gone, is there any problem with this? He is listed as a NHCE in the ADP test results, and there are no HCE's according to the way the test printed out. Is this correct?

[MWeddell]

I think the ownership of the stock may be attributed to the son. If so, the son is considered a 5% owner and hence a highly compensated employee. Perhaps someone else who routinely works with family-owned businesses could confirm this.

[Guest ESOPwizard]

Family aggregation is gone, but attribution rules still apply.

Someone can still be an HCE (regardless of his compensation)if

is a 5% owner by attribution.

[Guest T Hoffman]

The definition of 5% owner in Code Section 414(q)(2) refers to Code Section 416(i)(1) which, in turn, refers to the attribution rules of Code Section 318. Under 318, an individual is considered to own any stock owned directly or indirectly by the individual's children. Consequently, an employee who is the child of an individual who has a 5% interest in the employer at any time during the look-back year or the determination year is treated as a highly compensated employee, regardless of the child's compensation level.

[Tom Poje]

which means:

code this employee as owning the stock. technically, by family attribution, the person does.

since he is the only employee, plan passes the ADP test, though depending on the software, it might say 'fail' simply because a plan with only HCEs is an oddity. some programs are don't have a default "If only HCEs then print "Plan passes ADP test"

by the way, the 5500 should show the employee as an HCE as well. Again, plan passes 410(B) if only HCEs in the plan, and again, depending on the software, if there is a 410(B) report, it might not say plan passes.

[david rigby]

Don't think so.

Yes he is HCE. But the plan still has to do ADP test since there are other EES, assuming that some of these are actually eligible to participate in the plan.

[Guest PAM]

Yes, there are two other NHCES eligible to participate, but their salaries are pretty low, and they do not choose to defer. I think I understand that I need to code the "son" as an owner and run the test like that. I guess that he will have to be returned all of his deferral unless a QNEC can work. I will run the test using both prior and current ee data. I realize it is too late for a QNEC using prior data, and my QUANTECH software is not set up to handle qnec based on prior year data, anyway. Any ideas, Tom?

[Tom Poje]

(My apologies, I misread the original message as to say the HCE was the only one in the plan vs. the only one who deferred- not a great candidate for a 401(k) is it?)

Guess I need more details before offering a solution.

Since so few people, I would assume plan is top heavy. especially if plan existed when Dad retired, I still think you have his account balance to consider. (It has been less than 5 years)

Anyway, if plan is top heavy, and is not standardized, then you could probably give a top heavy/QNEC to the NHCEs. Or maybe I should say, you would probably want to do that anyway.

For your information, when QUANTECH calculates amount of QNEC, it first determines the amount of % needed to pass the test. (e.g. if HCE was 5% and NCE was 2%, system would say 'raise all employees 1%) It would then multiply compensation by 1% and say "will pass with a QNEC of $xxx." If there are some employees not eligible to receive a QNEC, the system makes an adjustment, taking that into consideration.

and just in case, what Quantech calls a QNEC is QNEC ADP and what Quantech calls QMAC is QNEC ACP. (grrrrrr, don't get me started)

Anyway, I got sidetracked. An odd thought hit me, I am going to sak some others on this one.

Suppose in 1997 I gave a top heavy.

Plan fails ADP in 1998.

Since we are in 1999, I can't give a QNEC on prior data.

Can I recharactrerize the 1997 top heavy as a QNEC?

well, as I said, maybe I need a few more pieces of info before I can offer any other help.

[Guest PAM]

This is a standardized document provided by MFS. There are two nhce employees eligible, but not participating. When I re-coded the "son" as HCE, Quantech adp test results suggested either returning all of "son's" deferral or a QNEC of $1600.00. This amount result in contributions to these two people in excess of 3% each. It is top-heavy. Am I understanding that the QNEC can serve as TopHeavy or is there an additional TH 3% needed? The HCE son deferred 5.5%. Thanks

[Tom Poje]

QNECs can count both as top-heavy and be used in the ADP test.

However, since plan is standardized, I think you are out of luck.

Standardized require that QNECs go to all participants, including HCEs. That is a stupid rule , but you have to follow the document.

but, again, what does the document say?

if it says QNECs must go to all participants, am I allowed to allocate different rates to different employees?

In other words, suppose you also had a 5% profit sharing contribution. Can I treat 3.5% as QNEC for NHCE and 0% for HCEs? That would pass the ADP test. now I test 401(a)(4) just like a cross tested plan. 5% for the HCE and 1.5% for the NHCEs. (I can't include amounts used in the ADP test) I'm not sure if you can do that, but it might be possible. I have to ask some other gurus if that is possible. sorry, I just don't know yet.

[MWeddell]

Legally, one can make a QNEC to all eligible employees but only include a portion of it in the ADP test if the dollars not included in ADP/ACP tests still pass 401(a)(4) on your own. I've done this before for a custom plan document but don't know whether it'll work with PAM's prototype plan document.