410(b) Issue for 401(k) Plan

[Guest emcelroy]

A law firm client maintains two 401(k) plans. The first covers just associate attorneys and only provides for elective deferrals. The second covers partners and staff and provides for elective deferrals and profit sharing contributions. It appears that the partner/staff 401(k) plan does not satisfy Code Section 410(b) Here are the numbers:

40 HCEs benefit under partner/staff 401(k) plan

147 total NHCEs (47 are associate attorneys)

100 NHCEs out of 147 NHCEs benefit under the partner/staff plan with respect to 401(k) deferrals

Ratio is only 68.03%

Any idea as to how we can pass? If we aggregate plans and aggregated plan is top heavy, the client would need to make a top heavy contribution to associates ... not a good solution.

Thanks in advance. Ed

[Doghouse]

This kind of design works better when the associates are HCE's. That fact notwithstanding, perhaps you can make a corrective amendment under §1.401(a)(4)-11(g) to bring in a few associates with a QNEC allocation?

Or, you can look at average benefits testing instead of ratio percentage testing.

[Guest Sieve]

According to your numbers, no associate is an HCE (since 100/147=68.03%). If any associates are HCEs, your numbers are off--if only one associate is an HCE, your ratio percentage goes to 69.7% (because the denominator is then <1.0).

In any event, the staff/partner plan, presumably, ought to contain provisions describing how to correct when there is a 410(b) failure (e.g., bottom-up or ratio percentage only, etc.). I guess I'd start there. And I think the correction, if the plan provides for correction of the ratio percentage, would be to add some staff who were otherwise excluded from that plan by age/service (thereby increaseing the numerator)--but it would take adding 10 otherwise ineligible NHCEs to bring the ratio percentage high enough (110/157=70%).