Young doctor blowing up CB/DC testing

[cohendrake]

Cash Balance plan maximizes owner and has 2% pay credit for about 10 NHCEs (other HCEs including spouse of owner excluded from CB) combines with a 401(k) that has the 3% nondiscretionary SH plus PS of whatever it takes to pass testing.

For 2016 a 30-year-old doctor (not key employee) became eligible and decided to defer $18,000. On top of that, the owner's spouse decided to go from a nominal 401(k) deferral to the $24,000.

Any thoughts appreciated.

 

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[BG5150]

Can you utilize component plan testing?  Sometimes known as restructuring?

[Tom Poje]

if it helps in the description

'pretend' you have a controlled group

2 plans, one tested on an allocation basis, the other on an accrual basis

each participant is in one or the other not both.

when testing the allocation group all other participants are includable and not benefiting, when testing the accrual group all other folks are includable and not benefiting

with a young hce in the mix deferring $$$$$$ you more than likely won't be able to use the avg ben test, so each 'plan' will have to pass the ratio % test.

you can pick and choose who you want, but best results using young NHCEs in the accrual group.

[CuseFan]

As Tom notes, because ABT is what blows up, restructured component plans would need their rate groups to satisfy ratio percentage - so if you have 3 HCEs and 10 NHCEs, you need at least 3 NHCEs with accrual rates higher than your target HCE, and then hopefully the rest should be able to pass on contributions. Also, it might take a targeted contribution (and an 11g amendment) to make that happen. Hindsight of course, but it's always a good idea to look forward and know what HCEs are doing and to communicate to owners that spouse deferrals may need to be limited due to testing and to consult with you to determine what can be supported. 

[BG5150]

^ no. (about needing the rate groups to pass)

You can split your population into two "plans."  The first has the offending HCE and a few NHCEs enough to pass coverage (in BOTH plans!).  Then you give them all the same ER contribution. That plan will pass on a contributions basis.  It's usually better to use the older NHCEs in the first plan.  That way, the second plan the participants with the lowest EBARs are out, making it easier to pass the rate group or ABT.

The second plan, you allocate in the manner you intended.  You can then run the nondicrimination tests for that plan in either the rate group testing on an accrual basis (assuming Gateway is satisfied), or if necessary, the ABT. 

This is assuming that everyone is in their own group for allocation purposes.

You probably would only need an 11-g amendment if you are failing somethinge due to the last day or 1,000 hour rule.