Cross-Tested 401(k) Plan with Prevailing Wage

[Guest 4:15 Limit]

We administer a 401(k) plan (not safe harbor) where the profit sharing allocation is cross-tested (everyone is in a separate group) & the plan's eligiblity is age 21, 1 year of service, semi-annual entry. There is also a prevailing wage component to the plan but, of course, there is no age or service requirement to receive prevailing wage contributions. The owner has two sons: one is eligible for the 401(k) plan and participates & receives prevailing wage contributions, and the other (let's call him X) is not yet 21 so he isn't eligible to participate in the 401(k) plan. During the current plan year X began working prevailing wage jobs and received almost a 40% of pay prevailing wage contribution.

The client has requested a profit sharing illustration but I need some clarification on who and what to include when I'm running the proposed cross-tested allocation. It appears that:

1. I am including both profit sharing and prevailing wage contributions in the average benefits test (and also 401(k) deferrals in my average benefits percentage test)

2. It would appear that I need to include all employees that are eligible for the 401(k) plan, plus those employees not eligible for the 401(k) plan but that are prevailing wage employees, in the test. So I would include X (owner's son) which would appear to make it impossible for any sort of cross-tested profit sharing allocation to be non-discriminatory.

Are there any other testing options that would help in this situation, or is there a way to exclude X from the test (or maybe my understanding is incorrect and X shouldn't be in the test in the first place)? Any thoughts on this would be GREATLY appreciated.

Thanks!

[Bill Presson]

I have never run a prevailing wage "component" as anything other than a separate plan, so keep that in mind.

But when I've done it, we always draft the document so that only prevailing wage compensation is eligible to be included in the prevailing wage plan (and no HCE's are eligible) and only non prevailing wage compensation is eligible for the regular plan.

Does your plan have some kind of split built in? If so, I think that's your testing answer. If not, I'm not sure how you're doing the allocations.