Younger HCE

[Guest klm401]

Four employees eligible for a profit sharing allocation. Two are older (55-60) co-owners making over compensation maximum. One is 45 year old employee. One is a 35 year old employee who recently (this year) became an HCE.

Owners want max (50K) and level percentage for other two employees. This worked in prior years a both were NHCEs. Now with the youngest employee as an HCE, can't pass testing.

Is there a way to solve this while still keeping it just a cross-tested profit sharing contribution?

Or is the only alternative to add a cash or deferred option?

Or is there another way?

Thanks.

[Guest GeerTom]

Assuming you're talking about something other than ABP, there is a way to make the situation more flexible. Adopt a plan amendment subdividing each allocation rate group into HCE/NHCE and key/nonkey subgroups. Then you can possibly limit the new HCE only to pass the test.

However, the situation is odd enough that general rules of thumb may not work. You really should get someone to do a formal design review, looking at all options. This should include redoing the allocation groups as needed.

Having said that, it's a fair bet you will want to add a deferral option, to keep the new HCE happy. If the test actually devolves to an age comparison of the new HCE and the older NHCE, you may never be able to get the new HCE to the same rate as the other NHCE. Getting the "right" result would take odd design and quirky other facts, if doable at all.

Tom Geer

[Guest klm401]

While staring at the ceiling I came up with the solution...

The plan has the 20% top paid group election. Using that, only the two owners are HCEs and the 35 year old is not (he is not an owner).

[Guest GeerTom]

Nice. I assumed the group was larger and we were hearing about the important folks. However, as I review the initial post it looks like your response is much more on point.