401a, why add a K feature

[Guest mr_patch]

Good morning,

I am currently working with a Dr plan that is a 401a PSP with a New Comp feature. I get that, in general, a 401(k) is a feature of a 401(a) plan. The "k" feature is merely the particular provision that permits employee contributions on a pre-tax basis, but it is already included in an "a" plan.

Question is: Any reason they would or wouldn't want to add the K feature to the plan? Would it effect the amount they could put away? Thanks

[Tom Poje]

to max out the owner in a ps requires 49,000 / 245,000 = 20%

the gateway would be 5%, though that doesn't guarantee passing any test.

if you allow deferrals and the owner defers 16500, then the profit sharing needs only be 32,500

32,500 / 245,000 =13.26%, so te gateway is reduced to 4.43% under the 1/3 rule.

so that would reduce the contribution to the rank and file.

however, you may fail the ADP test if you get little or no deferral. possible drawback

unless the NHCEs defer, the avg ben % test will be harder to pass as the NHCEs are receiving only 4.43% rather than 5%.

on the other hand, if you get any deferrals from them, the test will be easier to pass.

if the NHCEs have been there awhile, most make the plan safe harbor, thus provided 3% safe harbor. this satisfies top-heavy, which is generally the case in a cross tested plan.

this satisfies the ADP test, so it doesn't matter if the NHCEs don't defer.

if the majority of the NHCEs have been there awhile, then the fact the safe harbor is 100% vested has little drawback.

[ESOP Guy]

Assuming the owner makes 245,000 I would add this

If you put the S.H. in place. Owner puts in 16,500 in 4k will get 9,800 in S.H. match.

Now to get him to 49,000 only takes a PS of 22,700. This is 9.26% of comp. Gateway 1/3 is just over a 3% cont for NHCEs. (still need to pass test)

So assume they all put in 5% 4k. They will get 4% S.H. match plus 3+% in PS, or just over 7%. This is often times the cheapest option for owner.

I would add even while cheap for owner most people woould be very happy if their employer was putting in around 7% for them. Add their own 5% that means they have a little over 12%/year being saved by rank & file. That should actually fund a good retirement if done for a few decades.

[Kevin C]

If the Dr. is age 50, there is also the ability to have an extra $5,500 of catch-up in a 401(k). If his/her compensation is less than $196,000, it becomes important that deferrals don't count against the deduction limit.

[Guest mr_patch]

It's a group of Drs so I would imagine some are over 50. That's of less importance than the actual mechanics of what the addition of a K feature would do. From the sounds of it, they may want to stick with the current 401a only and skip the K plan unless most of the NHCEs are going to defer? They certainly don't want to put something in place that limits the Drs any more than they already are.

[John Feldt ERPA CPC QPA]

If the employer just doesn't want the hassle of handling employee deferral withholding elections and doesn't mind not having the catchup, a profit sharing only design may be satisfactory (it just depends on their goals and objectives). Sometimes simpler still wins the day, even if it is less efficient with the contribution dollars.

[david rigby]

Sometimes simpler still wins the day, even if it is less efficient with the contribution dollars.

Amen.

Another possible reason to avoid the EE deferrals is the increased employee expectation of directing the investments.