Excluding Owner(s) from Cross-Testing Contribution

[Guest Pat of RPC]

I have a 6 person plan (PS/401K); 3 owners A, B, & C. 2 children (1 of Owner A, 1 of Owner B). 1 Non-Highly Compensated Employee. 401(a)(4) General Test is failing miserably. Test will only pass when Owner C, who does not want to participate in Cross-Testing Contribution and would rather take more income, and the children of the owners are excluded from the Cross-Testing Contribution. Thus when test passes, only 2 owners and 1 employee receiving an allocation. Can I exclude these three participants from the Cross-Testing Contribution? If so, are they excluded from the entire plan, including salary reduction? All input greatly appreciated.

[Tom Poje]

you can write a document to exclude anyone you wish, but you would still need to pass coverage and nondiscrim testing. People excluded from a plan are treated as includable and notbenefiting for coverage purposes, excluded entirely from the ADP or ACP test since they are not eligible, and show as a 0 on a(4) testing.

generally if they are HCEs that are excluded it only helps testing.

On the other hand, you could leave them in the plan and put people into different groups (excluding keys from top heavy minimums) if they don't defer, it helps the ADP test because you hhave HCEs that show up with 0. for purposes of a(4) [nonelective contributions] if they are in their own group, you don't have to provide that group anything and they show as a 0 as well.

[Bird]

If you have an existing plan, the real question is, "what does the plan say?" If each participant is in their own group, then sure, you can pick and choose. If not, then you have to work within the terms of the document.

Test will only pass when Owner C, who does not want to participate in Cross-Testing Contribution and would rather take more income, and the children of the owners are excluded from the Cross-Testing Contribution.

Not quite true; you can always increase the NHCE's contribution.

[BG5150]

Not quite true; you can always increase the NHCE's contribution.

Or lower the HCE contribution some. Maximizing owners' contributions isn't sacrosanct.

Or a combination of the two.