Cross Tested 401(k)/Profit Sharing Plan

[hch4cpa]

I am the CPA for a group of Doctor's who have a Cross Tested 401(k) & Profit Sharing Plan. In reviewing the Plan valuation report / Form 5500, I am not 100% sure that the TPA is doing this right, based on my limited understanding.

3 Doctors, all are HCE with income in excess of $275,000

6 NHCEs (Ages anywhere from 20-70, but most younger)

 

All eligible employees are participating, and the doctor's are contributing the $18,500 plus catch up.

Everyone gets a basic Safe Harbor match - 100% up to first 3% of wages, 50% of the next 2% - for a 4% Safe Harbor Match.

The HCE are getting a profit sharing contribution of $25,500 (9.27%) to get them to the max total contribution of $61,000.00

The NHCE simply get an across the board 3.09% (1/3 of 9.27%) profit sharing contribution.

Is this how the Gateway Allocation test is supposed to work?

My information seems to suggest that the Safe Harbor match goes in to the Gateway Allocation %....so if the HCE's are getting 4.00% + 9.27% = 13.27%, than the NHCE should only get a total of 4.42%.

[Mr Bagwell]

The safe harbor match does not count for gateway test.  So the 3.09% will pass the gateway test.

The ABT and Rate Group tests need to pass.

 

[hch4cpa]

Thanks for the insight.

So this is the best option for getting the HCE's to $61,000 and keeping the NHCE profit sharing as low as possible?

[Mr Bagwell]

No.  The safe harbor 3% nonelective would be the cheapest because the 3% safe harbor would count for the gateway.  So instead of the potential 7.09% (4 + 3.09) outlay, the Employer would be on the hook for 3% plus necessary amount for gateway.

This of course all depends on whether the plan passes non discrim tests.

[Tom Poje]

if the owners did not get the match, then instead of 9.27 to max out they would now need 13.27 ps, so the ps for the NHCEs increases to 4.43

so as far as cost goes, it depends on how many NHCEs are deferring

[justanotheradmin]

I agree with Tom. 

To get a sense of whether or not the match is more efficient at maximizing the HCE contribution than the PS you should look at what portion of the Total Safe Harbor match is going to the HCE. 

If the HCE's are receiving 75% of match dollars, but only 60% of the PS dollars, then they might want to consider doing a Discretionary Match + SH Match + PS to get to the maximum. That's assuming of course the plan document allows for a discretionary match and safe harbor match at once. Ours usually do, so sometimes our clients like to do their 4% SH Match, + 4% disc Match, + the 3% / 9% PS.

If they think the match will continue to be favorable to the HCE for future years, they could try to increase their SH match formula up to 6%.

[Mr Bagwell]

I agree with you and Tom.

I find that owners don't care what they have to put in for themselves, but knowing that they could do 3% instead of 4% to NHCEs (assuming everyone deferred) plus a little gateway, they are all over that.

All depends on whose deferring, like Tom said.

[JackS]

You state all of the NHCE's are participating.  This is understandable as there is a Safe Harbor match available.  In this case, it is unlikley that a discretionary match would be more efficient than the profit sharing allocation.  It's possible...say if all 9 employees earn $20k a year.  From a strict $ and cents perspective a SH NE may be the most efficient but you would find that employee particpantion would tend to lag.  If the Dr's objectives are to make sure eveyone is getting a meaningful retirement benefit....5% 401k+4% Mc+3% PS =12%.  That's a meaningful benefit and presumably with the proper communication, their employees see this and understand what a meaningful benefit they are receiving.