Imputed Disparity in a Cross Tested Plan where all HCEs earn < FICA

[CharlesLeggette]

New company...2 owners are younger than 13 other ees and make around $100k each....less than FICA limit....

So under permitted disparity, this falls into category where all ees make less than the FICA $118,500.

It sounds like the allocation rate for the hcees can be 2x the nhcees and they would pass if permitted disparity was invoked...but I cannot get my arms around exactly what the regs are saying....can someone clarify the procedure.

[Bird]

I'm going to be somewhat picky about terminology.

"Cross tested" to me implies converting contributions to projected benefits and testing those benefits. You're not doing that if the HCEs are younger than the NHCEs. You're really talking about "general testing" where you are not using a safe harbor formula that is deemed to be nondiscriminatory, but you are testing the actual contributions after they are determined by some other formula. (e.g. "Bob gets 6% and Sally gets 3%.") More specifically, you are talking about contributions-based general testing, where you are directly trying to prove the contributions are not discriminatory (as opposed to the projected benefits).

You do get to impute permitted disparity, but you don't get to do it depending on whether someone is an HCE or NHCE. So when you do it for everyone, and they are all below the SSWB, yes you are (in certain ranges) going to double the contributions for testing purposes...but it's not going to help since you are doing it for everyone, HCEs and NHCEs.

You're stuck with a pro-rata allocation...unless someone knows something I don't.

[AndyH]

Well said. Permitted disparity won't help the situation being described.

And if this is a tax driven plan, you generally don't want either a DB or a cross tested PS plan if the owners are younger than the NHCEs.