Owner's Son Now Eligible

[Logan401]

Client's plan has a safe harbor NEC.

Owner's brother was an NHCE in prior year, and helped the cross-testing because he was the youngest employee.

The brother is now an HCE based on prior year pay.

In addition, the owner's son is newly eligible.

Obviously, this does not work very well for the owner.

Is it required the the safe harbor NEC be included in the ratio test for cross-testing?

Can only the the discretionary nonelective be tested?

[Tom Poje]

all nonelectives have to be included.

depending on the population you may have to test using component plan testing.

test one group of employees on an alloaction basis and the rest on an accrual basis.

e.g. test the young HCEs on an alloaction basis with old NHCEs (all other participants treated as includable and 0

and the owner with young NHCEs on an accraual basis.- all other participants treated as includable an 0

you still have to provide the gateway to all NHCEs no matter which group they end up in.

The power of component plan testing is you get to pick and choose who is in what group. no fair duplicating ees. no fair leaving someone out.

disadvantage: depending on the software you use, illustrating it.

For 2014 I think I'd amend to exclude HCEs from the safe harbor. Also make sure key ees aren't required to receive top heavy

[John Feldt ERPA CPC QPA]

Depending on how many NHCEs you have, you could component test, sometimes called restructuring. In essence, you have two plans for testing:

Plan 1: Test the older HCEs and the youngest NHCEs on a benefits basis.

Plan 2: Test the young HCEs and the older NHCEs on a contributions basis.

Make sure each "plan" passes the 70% ratio test for coverage. Also, make sure the plan document allows non-uniform contributions.

Edit to add: Tom got here first - listen to him.

[Logan401]

There are only 2 NHCES in the plan.

HCE 1: OWNER is 59

HCE 2: Son of Owner: 24

HCE 3: 32

NHCE 1: 55

NHCE 2: 51

[Tom Poje]

so if HCE 3 and the son receive 3% and tested on an allocation basis then no matter what NHCE 1 receives (as long as it is = or > than what they receive) you will pass ratio because

1/2 NHCE ratio and 2/3 HCE ratio = 75.7%

testing accrual rate you have

1/2 NHCE and 1/3 HCE for 151% so as long as the NHCE accrual is > HCE accrual rate you pass.

you have an 8 year age difference, so 1.085 ^ 8 = 1.92

in other words, the owner can receive 1.92 times whatever the NHCE receives. (but this would pretty much be true even without the kid in the plan, it is just you have to test special.

if owner was born in first half of year and NHCE 2 in 2nd half of plan year then possibly you have a 9 year age difference and can do even better.

If more than 3% is provided, then imputing disparity might kick things up even higher.

[Logan401]

So the Owner gets tested on a benefits basis, and it passes as long as his EBR<= to NHCE 2 (highest EBR) he is tested with.

The other 2 HCEs are tested on a Contributions basis, and will pass as long as their Contribution % <= NHCE 1 (lowest EBR).

HCE 1 rate= 16.50%, has an EBR of 3.39. It will take 8.60% to get NHCE 2 to 3.39 EBR, just like you said.

For the other 2 HCEs, will this mean they can both receive up to 8.60% and it will pass as long as NHCE 1 receives the same?

[Mike Preston]

If you use permitted disparity, they may not even need 8.6%. Just remember that all NHCE's have to get the gateway, which would be 1/3 of gateway comp time the highest HCE rate, which in your example appears to be 5.5%.

EDIT: Misread the situation. Ignore the above.

The 8.6% you are giving to NHCE 2 has no bearing on the percentage you give to HCE's 2 and 3. Whatever the highest percentage is to HCE's 2 and 3 must be provided to NHCE 1. My comment remains with respect to permitted disparity though.

[John Feldt ERPA CPC QPA]

Assuming this is a DC plan only, the "gateway" itself is never more than 5%. Now, there could be additional profit sharing above the 5% minimum gateway (as needed to help pass 401(a)(4), maybe to just one person), but gateways over 5% only begin to apply when a DB plan is involved. Probably Mike had a typo and really just meant 5%.

Mike is also right about the amount to give to the 2nd component plan - it has no bearing on the others (unless a lot of money is going in and the 404 deduction limit becomes an issue), just make sure the gateway is applied to the whole plan, not just to one component plan within the whole plan.

edited to add: Okay, now if you are using some compensation (less than total comp) that passes 414(s) and you want to use the 1/3 gateway at 5.5%, I can see how that is workable and could actually be less than minimum gateway using total 415 compensation at 5%.

[ESOP Guy]

Unless this just doesn't work for the people couldn't you make change the plan to make the son not eligible for a contribution, or put him in a class that gives him a very low contribution? This idea might only help going forward.

I never did a ton of these types of PS plans but I do seem to recall writing prototypes that allowed the HCEs to be put into classes. For example we would classify all HCEs who are HCEs by family attribution into a class and give that class a zero or very small contribution.

[Mike Preston]

Stuff gets complicated, doesn't it?

[ESOP Guy]

Stuff gets complicated, doesn't it?

As one of my old bosses used to say, "if it were easy we wouldn't have a job".

[Logan401]

In a different scenario where there is 1 HCE who is 30, and one NHCE is 60.

If the NHCE is receiving 10%, we can then just test on a contribution basis and it will pass as long as HCE gets 10% or less.

[chc93]

In a different scenario where there is 1 HCE who is 30, and one NHCE is 60.

If the NHCE is receiving 10%, we can then just test on a contribution basis and it will pass as long as HCE gets 10% or less.

Yes. If NHCE gets 10% and HCE gets 10%, it's a safe harbor uniform percentage, and no testing is required.

if NHCE gets 10% and HCE gets less than 10%, HCE's rate group coverage passes at 100% on a contributions basis.

No need to cross-test on a benefits basis at all.

But, as a side note, we had a plan in the past that mandated cross-testing on a benefits basis in the document. So even a safe harbor uniform percentage contribution allocation could potential fail. The plan was amended to remove this restriction.