Is New Comparability Formula Creating a CODA?

[Susan S.]

I am in the early stages of taking over the TPA work for a SH 401(k) plan with cross-tested PS contribution. The plan includes the owner and his son. There are no other employees. They only want to max out the father. They don't need the SH with 2 HCE's but I guess they are covered in the event they hire anyone else.

I am concerned about the new comparability formula creating a CODA. Is this only a problem if the owner is a sole proprietor? Or is it irrelevant since all are HCE's?

[Tom Poje]

it is probably hard to prove one way or another, it really shouldn't matter if there are NHCEs or not (at least with only HCEs there is no coverage or nondiscrim testing)

the LRM that came out in 2011 (see next to last page) warns of the possibility of creating a CODA where none exists (of course, if one exists there is the possibility of excess deferrals being generated) My guess it is not so much of a problem when there is just one owner (and / or family involved) If you have multiple partners and some are maxed out and others not it looks rather suspiciously like a CODA.

of course the company could have put in 20 plans, one for each partner and could have accomplished the same thing to get around that, but that is another issue.

As I recall, at one of the ASPPA Conferences, the IRS said they "would know abuse when they saw it"

lrm.pdf