Non deferring participants as an allocation class?

[Richard Anderson]

For a CT 401(k) plan, could these be the participant classes:

1. Owners

2. Non owners who have elected not to defer

The employer would then provide a matching contribution to those that defer and a p.s. allocation to those who did not defer.

I'm sure that the employer could not allocate a p.s. contribution to only those that defer; that's the definition of a match. But, can a class exclude those who are deferring?

[Guest]

I would feel umcomfortable about such class.

One, you are taking away from incentive to defer. you could end up failing ADP test as a result.

Two, I'm not sure if such a class is going to help testing a whole lot. Suppose 50% of the ees defer and get the match. that means only 50% will be eligible in your NHCE class.

That means you have at least 50% of the employees not in the HCEs rate group, and depending on their ages, things will only get worse. So your ps contribution will probably greater than the match. This will go back to point one, in which someone is better off if doesn't defer.

Also, usually class refers to job description or title. I (personal opinion) think the class you suggested is really pushing it.

Is there anything in the law that says you can't? Not sure. I haven't thought about setting up a class as you suggested.

Again, all this is my opinion, but hope it helps anyway.

[Richard Anderson]

Thanks Tom. I agree with all of your points. It does seem to be pushing the rules, but the argument can be made that the employer wants to also benefit those employees that can not afford to make deferrals. Therefore he wants to do a profit sharing contribution, but the employer is already contributing a match to those who are deferring, and he does not want to increase his contribution to that group. Therefore he wants to make a smaller contribution only to those not deferring.

Here's what the real deal is. This plan has 5 HCEs. The owner HCE is the only HCE to get the profit sharing contribution. It will take contribution of about 1.3% of comp for the benefiting NHCEs in order for there to be enough NHCEs in the owners rate group. There are about 50 NHCEs eligible in this plan. Even at 1.3%, the contribution is well above what the employer is willing to do. With only 1 HCE benefiting, if I can eliminate one-half or more of the NHCEs from the contribution, it still passes a(4) easily.

The plan easily passes ADP also. 5.98% for NHCE and 2.11% for HCE. The plan has a lot of relatively high paid NHCEs that are deferring high percentages, and I doubt that a 1.3% ps contribution will deter them from contributing.

The plan would easily pass non-discrimination, but I would like a little bit of comfort that the IRS would allow it, before we try to sell it to the client.

[Guest FredReilly]

I think the only real issue is the non-discriminatoty classification test. Does the definition of the class meet the necessary requirement. But it sounds as if it would pass the ratio percentage test, in which case it is irrelevant since you would only be using the ABT for (a)(4) purposes.

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[IRC401]

Doesn't 401(k)(4)(A) kill the idea? (although it wouldn't surprize me if the IRS were to grant a determination letter)

[Richard Anderson]

Thanks IRC401; you are correct. 401(k)(4)(A) does not allow any other contribtion to be conditioned on the participant electing to defer or electing not to defer. After reading 401(k)(4)(A), it seems clear that a contribution allocated only to those that are not deferring would disqualify the CODA.

[actuarysmith]

A CODA does not allow any other benefits to be contigent on it, or allow it to be contingent on any other benefits.