Permissively Aggregate Owner's Plan with Staff Plan

[Oh so SIMPLE]

A new customer is the sole owner of a business with about 100 employees. The owner is very sensitive to the possibility of his staff employees finding out what the owner's financial worth is. I've known him for years, in other contexts, and this has been, even before considering a plan, something of paramount concern to him. He outsources all bookkeeping, billing and accounting chores for the purpose of firewalling financial information from his employees.

He wants to set up a 401k plan and is willing to put in 5% of pay for all plan-eligible employees, so that he himself can cross-test his way into $55,500 a year. Given the rate of turnover of staff, we have determined that within 3 years the plan would likely be top-heavy, i.e., he would have more than 60% of the accumulated benefits in the plan. He is very concerned that this would cause discord by several employees if they figured out he had the lion's share of the accumulated benefits.

We are considering setting up two plans. One just for "owner-employees", but permissively aggregating it with the other, generally available plan.

The general plan will not be permitting employee direction of investment. The owner is insistent about this as well. All investment decisions will be made by a 5-person committee the owner will appoint. The owner will be the trustee.

For the owner's plan, the owner will be the trustee as well. No employee direction of investment either. The trustee, rather than an investment committee, will make the investment decisions over the owner's plan.

Effectively, this gives the owner individual direction over his benefits, but not the other employees over their benefits. Due to the permissive aggregation for nondiscrimination and coverage testing, the two plans will be but one 'plan' (Treas Reg section 1.401(a)(4)-12, definition of Plan) for purposes of the Treas Reg section 1.401(a)(4)-4 rules against discrimination regarding benefits, rights or features, of which participant direction of investment is clearly identified as one.

Facially and technically, employee direction of investments will not be permitted under either plan. On the surface, the difference is merely that in the staff plan, an investment committee will be directing the trustee on what investments to make, while in the owner's plan, the trustee makes those decisions without a committee. The owner will only be directing the investment of his own benefits in his role as trustee of the owner's plan, not in his role as an employee. But because he 'wears both hats', the practical effect is that this highly compensated employee chooses how his benefits are invested, but the others (nonHCEs) do not.

The ERISA attorney cautions against this because of Treas Reg section 1.401(a)(4)-4© effective availability of BRFs, but also noted that, on the other hand, federal courts have applied differently rules to multiple hat wearer's actions, depending on what hat applies to the specific action being taken. She said it in any plan where the trustee makes investment decisions the trustee is also a benefiting employee, the effect is that the trustee/employee gets to decide investment of his or her benefits while the other benefiting employees do not. She was not aware of any ruling that basically had the effect of saying that a non-directed trustee must not be a benefiting employee him/herself. She suggested that if this two plan approach is implemented, the trust documents ought to be drafted to give the trustee authority to either direct the investments or delegate to a committee of 1 to 7 benefiting employees to decide and give investment directives to the trustee. Then, as trustee of the staff plan, the owner would delegate to a committee made up of 5 benefiting employees for the staff plan and to a committee of 1, himself as the only employee benefiting under the owner's plan.

I am wondering what you think, what other approaches might be taken to accomplish these objectives, etc.

[Bird]

The approach of having multiple plans which effectively allow self-direction as you describe has been suggested by some well-know pension experts for a long time. Personally I'm uncomfortable with it and haven't ever done it.

(You don't say how many of the 100 employees will be participants but it's interesting that such a plan could become top heavy.)

[John Feldt ERPA CPC QPA]

Agree with Bird.

Either very low paid 100 employees, a lot or part-timers, or a lot of turnover before becoming vested, or similar. Otherwise difficult for a 100 person plan with just one key employee to become TH in such a short time. Not sure how the employees would really know the plan is top heavy.

$51,000 + $5,500 = $56,500

[BG5150]

Agree with Bird.

Either very low paid 100 employees, a lot or part-timers, or a lot of turnover before becoming vested, or similar. Otherwise difficult for a 100 person plan with just one key employee to become TH in such a short time. Not sure how the employees would really know the plan is top heavy.

$51,000 + $5,500 = $56,500

Yeah. Especially if they are getting 5% already.

[david rigby]

He is very concerned that this would cause discord by several employees if they figured out he had the lion's share of the accumulated benefits.

I agree with other comments.

There is an implication that "becoming" top-heavy will cause discord. Does the owner really think the other employees don't already know he has "the lion's share"?

[BG5150]

And what of the discord that would be sewn if someone finds out he has his very own plan! (Won't there be two 5500's publicly filed? )

[401king]

Are these two separate issues for the client, or is he trying to setup two plans due to the Top Heavy issue? One doesn't seem to help the other. The Top Heavy is moot due to the 5% company contribution.

As BG5150 mentions, if the owner has his own plan then his account balance will be even more on display. The 5500 is public record and can be found by anyone with a computer.

[Bill Presson]

I'm pretty sure that EZ filings and SF filings checked as one participant plans aren't available on EFAST.

[Mark Whitelaw]

You need to go outside the tax-qualified plan or 409A structures to accomplish your objectives. An after-tax strategy with a REBA (Restricted Employee Bonus Arrangement). Can be structured as private, external, after-tax (Roth alternative), no contribution limits, employer can control allocation of all funds while HCE is employed, employer can designate whatever vesting schedule it wants on an individual or class basis, individual can specify amount of personal contribution capacity they want for their personal planning, third-party administration to the HCE for life - $0 added costs. Your client has the choice of sponsoring a benefit plan or facilitating key employee access and funding to an external TPA sponsored program to have the privacy he seeks.

[ESOP Guy]

I realize the owner wants control of his money but here is another idea:

Let the investment committee decide the investments in the employee plan and write an investment policy for the owner's plan that says it will invest its assets in the same investments at the same ratio. In effect the committee is deciding the investments both plans.

Not sure if it is a good or bad idea kind of just throwing out an ideas to help maybe spur other thoughts.