Top-paid election

[ERISA25]

Is there any negative effect from making a Top paid group election. If we were considering making a top paid group election to help pass testing, is there any potential negative consequences for doing so. It appears to me that the election may be made and changed pretty freely. I realize it's a very general questions, but I was wondering if anyone has any general thoughts or comments.

[JanetM]

See notice 97-45 http://benefitslink.com/IRS/notice97-45.html

If I recall, the only negative could be if you have high turnover, then you will be including folks in the group have terminated employment, lowing the group average.

I You will most likely have to amend the plan to allow for it. As for freely changing the method of determining HCEs, I don't think you should be changing back and forth too often. Have you considered a safe harbor formula to avoid the whole testing issue?

[BG5150]

I thought that using the Top Paid group, you would have to apply that HCE definition to all other plans of the Employer, too.

Also, a negative could be if those people who are highly paid but are not considered HCE do not have a deferral, your test could be worse off.

And switching from one mode to another does require a plan amendment, so there is time and effort and (probably) money involved. (Plus the time and effort of distributing the SMM's.)

[MWeddell]

Another negative may be data collection. If you normally have access to demographics for just one portion of your controlled group (such as you manage benefits for a subsidiary of a larger company that has separate plans for other subsidiaries), realize that someone needs to look at the data for the whole controlled group to determine what the top paid 20% group cutoff is each year.

[ERISA25]

I thought that using the Top Paid group, you would have to apply that HCE definition to all other plans of the Employer, too.

Also, a negative could be if those people who are highly paid but are not considered HCE do not have a deferral, your test could be worse off.

And switching from one mode to another does require a plan amendment, so there is time and effort and (probably) money involved. (Plus the time and effort of distributing the SMM's.)

Thanks for the help. One follow-up to BG5150. I assume that they would be worse off because that would have, but for the election, lowered the ADP for the HCEs had that person been included in the testing group. Is that right? Whereas, after the election, that ADP would be computed without regard to that person who did not defer. Is this correct? Tks.

[ERISA25]

I thought that using the Top Paid group, you would have to apply that HCE definition to all other plans of the Employer, too.

Also, a negative could be if those people who are highly paid but are not considered HCE do not have a deferral, your test could be worse off.

And switching from one mode to another does require a plan amendment, so there is time and effort and (probably) money involved. (Plus the time and effort of distributing the SMM's.)

Thanks for the help. One follow-up to BG5150. Please excuse me if this is a dumb question, but I assume that they would be worse off because that would have, but for the election, lowered the ADP for the HCEs had that person been included in the testing group. Is that right? Whereas, after the election, that ADP would be computed without regard to that person who did not defer. Is this correct? Tks.

Also, is it true that if you make the election for one plan, you would have to apply that HCE definition to all other plans of the Employer too? I was under the impression that if you make an top paid election then you must be consistent in regard to the exclusions that you use in determining the top 20%. I'm somewhat new to this, so I could be wrong.

[BG5150]

Thanks for the help. One follow-up to BG5150. Please excuse me if this is a dumb question, but I assume that they would be worse off because that would have, but for the election, lowered the ADP for the HCEs had that person been included in the testing group. Is that right? Whereas, after the election, that ADP would be computed without regard to that person who did not defer. Is this correct? Tks.

If a person who made more than the HCE limit (and is not a 5% owner) is eliminated from the HCE group due to the top paid group election, he or she is then tested as an NCHE; he or she is not removed from the test.

A quick example: (H = HCE, N = NHCE)

ADP test 1:

H1: 10%

H2: 8%

H3: 0% HCE avg: 6%

N1: 4%

N2: 4%

N3: 4% NHCE avg: 4%; test passes

ADP test 2:

say H3 is not in top 20%, test becomes:

H1: 10%

H2: 8% HCE avg: 9%

N1: 4%

N2: 4%

N3: 4%

H3: 0% NCHE avg: 3% test fails

So, here you can see where a top paid group election would not be beneficial. But note, that H3 gets moved from the HCE group to the NHCE group; H3 is not removed from the test altogether.

[Lou S.]

Is there any negative effect from making a Top paid group election. If we were considering making a top paid group election to help pass testing, is there any potential negative consequences for doing so. It appears to me that the election may be made and changed pretty freely. I realize it's a very general questions, but I was wondering if anyone has any general thoughts or comments.

Every group is different. Some employers get "better" results with the TPG some get "better" results without the TPG.

[Guest Phineas]

Also, is it true that if you make the election for one plan, you would have to apply that HCE definition to all other plans of the Employer too? I was under the impression that if you make an top paid election then you must be consistent in regard to the exclusions that you use in determining the top 20%. I'm somewhat new to this, so I could be wrong.

Yes. This applies even across QSLOBs. You would need this set group of HCEs to test 401(a), 401(k), 129 and 125 (with the inclusion of newly hireds who are expected to be compensated above the HCE threshold) plans. This election, and it must be amended in the plan, effects all other plans in the controlled group and the amount of work necessary to collect the proper data. However, please remember, that when calculating the top 20%, you take the greater of the statutory threshold ($110,000 for 2009) and the calculated threshold.

[12AX7]

I'm not aware of any limit in the number of times a Top Paid Election may be changed. Since the change is a discretionary amendment, it must be in place by the end of the plan year for which the change becomes effective. IRS has commented on this issue several times in the recent past.