HCE in more than 1 plan

[AKconsult]

I must be missing something, please let me know.

What would prevent an owner with 2 businesses from having a plan for each business, with identical plan provisions, both of them safe harbor matching plans. Then paying himself $225,000 from each company, contributing $9,000 in deferrals to each plan and getting a $9,000 SH match from each plan? It doesn't seem like he should be able to get more than $10,600 total match ($265,000 * 4%), but I don't know what is stopping him in this scenario. The plans could be combined for coverage and ADP testing and would pass. top heavy wouldn't be an issue if there are no additional employer contributions. So is this permissible? Obviously you could argue why go to all this trouble and expense of 2 plans just to get an extra $7,400 matching contribution... and maybe that is the answer (?)

[ETA Consulting LLC]

You always start with 410(b). Let's suppose you have this one owner with Company A and Company B. Company A has 9 NHCEs and Company B has 9 NHCEs. The one owner is the only HCE.

Your coverage would look like this:

Company A : 100% HCE and 50% NHCE < 70% so it fails.
Company B : 100% HCE and 50% NHCE < 70% so it fails.

So, when you combine for 410(b), then you must combine for all plan purposes; and this is where you would experience your problem. If nothing else, you'd have a discriminatory rate of match when testing against compensation limited by 401(a)(17).

Good Luck!

[My 2 cents]

Wouldn't the compensation limit involve combining compensation from all controlled group sources? Ditto for 415 limitations, 401(k) limitations, etc.?

[ETA Consulting LLC]

Yes, but at the testing level; and not likely within the allocation level of each plan. You may have two distinct companies that pay you $200K each and provide you a 10% allocation. That would be fine since it's only $40k toward your 415 limit. But, the moment you have to combine for 410(b), you'd it problems. You'd end up with a $40K allocation tested against a $265k 401(a)(17) limit.

When dealing with separate companies, I don't think allocations actually stop once Compensation reaches the 401(a)(17) limit, but you're limiting your testing Compensation to that amount; which would only come into play when you aggregate the plans.

Good Luck

[BG5150]

You would only have a 410(b) coverage problem if you are using the ABT. Ratio test doesn't care how much you make or what the allocation is.

[ETA Consulting LLC]

You would only have a 410(b) coverage problem if you are using the ABT. Ratio test doesn't care how much you make or what the allocation is.

True and false. True that you won't have a coverage issue, but you don't want to overlook the non-discrimination issue (which is a slightly different standard). BRF must be currently and effectively..... blah, blah, blah. You can permissively aggregate two plans and pass coverage, but run into a problem with a nondiscriminatory rate of match. 415 requires automatic aggregation of DC plans. But when given an allocation (let's say 4%) on Compensation from two distinct members of a controlled group (Let's assume $250K from each Company); then that $10,000 to each plan will not violate 415 or any nondiscrimination test when each plan passes on its own merits. The moment you permissively aggregate (which is not ABT), then you must also aggregate for BRF; which gives you a $20,000 allocation on $265K in Compensation (which is a 7.54% rate of match where the highest possible rate for all your NHCEs is 4%. I think this is where you have issues.

Just as a side note: I typically never let my testing go this far. When consulting my clients on plan design, I try to stay as far away from the ledge as possible (to avoid the possibility to ever going this far). In theory, you may get anything to pass if you pay someone to take testing far enough, but that's not a set of services I try to sell. I admit, this is neither here nor there, but I wanted to make that point. As for this discussion, however, I think it helps to work it through and determine how a potential workaround may run into additional issues as you work through the testing process.

Good Luck!

[austin3515]

I have heard of professional firms that set up Plan A for the NHCE managers and Plan B for the NHCE Staff (both SH Match). They then exclude the non-partner HCE's from BOTH plans (I think just for the match, because not top-heavy?), and cover the Owners under BOTH plans. Both plans pass coverage on their own because of all of the excluded HCE's. The partners get the full $10,600 match from BOTH plans (assume they are over 50 and split their 401k down the middle.

I couldn't sleep at night with this plan design, but it is pretty cool for demonstrating the points discussed above when taken to the extreme. Obviously I doubt the excluded HCE's are loving their employer, but who knows maybe they are happy with their big fat paychecks and the choice of contributing the max.

[david rigby]

Hey Austin, maybe your scenario would be of interest to Derrin Watson for his Q&A column.

[austin3515]

Let me be clear - I was not the author. The person who was is probably a name you recognize (not quite a Tom Poje but your closer in terms of notoriety). I was in awe of the pension genius when I heard it.

[austin3515]

Come to think of it, I actually think it was the 3% SHNEC design (again excluding HCEs), where they were doing the 9% of pay in both plans for the owners. Same logic applies.

[shERPA]

Yes, I've seen the 3/9 double up presented. Cover owner(s) in both plans. Cover 1/2 of NHCEs in each plan. Exclude "disposable" HCEs from one or the other plan as necessary to allow each plan to pass the ratio test.

[Kevin C]

Interesting plan design. After some reading, it appears you would not be able to do this using a safe harbor match in the design. 401(k)(3)(A) and 401(m)(2)(B) have language that with HCE's in 2 or more plans of the employer, you count all deferrals and all match in each plan when you determine if the plan passes the discrimination rules. I think that prevents you from having the HCEs receive a SH match in both plans because of the limits on SH matches . 1.401(m)-3(d)(5) is pretty specific that it would cause a problem with the ACP safe harbor. I'm guessing that's why the two examples mentioned used the 3% SH.