Plan Design - Owners Creating New Plan for Staff

[Guest Pippy]

We work with a 401k plan with two owner/employees who hit the 402g limit and with profit sharing, hit the 415 limit. They've adding 9 staff members in 2014 with a payroll of $1.1 mil exclusive of the owner’s compensation. Of the 9 staffers, two will make in excess of the compensation limit and the other 7 will hover around or above $100k. None of the 9 will be owners or officers and there are no family member-employees. We're expecting 100% participation from the staffers.

In considering plan design, we initially considered incorporating the staffers and adding safe harbor since as near as I can tell the plan instantly will be top heavy. However, the owners are balking at the cost of either the basic match or the non-elective given the size of their payroll. Similarly, we considered new comparability design but anticipate that will be cost-prohibitive as well.

We're considering starting a separate plan for the staffers, which would exclude the owners and vice versa. From what I've read, as long as no key employees participate in the staffers' plan, they do not need to be aggregated for top heavy testing. We're aware, however, that if any of the circumstances change and a staffer becomes a key employee, they must be tested together for top heavy.

What I don't understand and cannot seem to find is what other impacts (other than administrative burden/expense) to nondiscrimination testing sponsoring two plans will have. Would the plans have to be aggregated for benefits, rights, and features if they use two different profit sharing formulas? Since neither plan will exclude employees or have allocation conditions on employer contributions, we don't anticipate coverage to be an issue if they have to aggregate the plans. Likewise, with ADP/ACP.

There has to be something I'm missing. Thoughts? Will setting up a separate staffers' plan work?

[ETA Consulting LLC]

Two said two contradictory things:

1) We're considering starting a separate plan for the staffers, which would exclude the owners and vice versa.

2)Since neither plan will exclude employees or have allocation conditions on employer contributions

Coverage will be an issue.

Good Luck!

[Tom Poje]

a good question, in fact, I would go so far as to say an excellent question.

I don't recall seeing an example like this written up anywhere.

You sound like the criminal mastermind on a Columbo mystery, worried, and thinking "I have the perfect crime to avoid top heavy. What am I missing?"

I think Dolly Parton was a special guest star....

so Detective Columbo shows up, runny nose, a cough, a sneeze...

"I'm thorry, but I have a bit of a code"

But the " Code" says (416(g)(2)(A)(ii)) "Required Aggregation - each plan of the employer which enables any plan described in subclause (I) [any plan with a key employee] to meet the requirements of section 401(a)(4) or 410"

now looking at the facts, if plan A only has the 2 owners, it has the key employees. But there are NHCEs. so in testing Plan A for coverage, it would fail testing because no NHCEs are benefiting (as opposed to there not being any NHCEs at all). Thus you have to aggregate for coverage to pass 410(b). But once you aggregate for 410, you have to aggregate for top heavy.

And of course, Columbo would conclude with "Got you!"

[Guest Pippy]

And of course, Columbo would conclude with "Got you!"

Ah...foiled again! Apparently I should have brushed on up on coverage basics before posting this. Back to the lab.

And thanks for the reference to my criminal mastermind. I like to think of it as MacGuyver'ing a solution. Regardless, thanks for the help!

[Tom Poje]

It's Friday, and after a mad rush to get things filed by the 15th, it was good that Columbo could stop by the office to break up the routine.

[buckaroo]

If the staff members are made up of seperate groups of some kind, perhaps you could include some of the staffers in the owners plan. In your detail, if you have 4 HCEs (2 of which are owners), and 7 NHCEs, you could make 3 of the NHCEs eligible for the owners plan and the remaining 4 NHCEs (and 2 HCEs) eligible for the other plan. The owner plan could be safe harbor and the other plan can be non-SH plan. You would pass coverage and even if the owner plan was top heavy, it would (most likely) satisfy the TH min, even if the owner plan wanted additional NEC. The tough part may be determing the groups and drafting the plan doc. The other consideration is the cost of maintaining two qualified plans.