Softball Pension Questions

[C. B. Zeller]

The wife has to get at least some of PS contribution, otherwise her comp wouldn't be included in the calculation of the deductible limit.

Catch-up contributions are not included in applying the 415 limit. So the wife can defer $26,000, then get a PS contribution of up to $30,000 - $19,500 = $10,500.

[BG5150]

47 minutes ago, C. B. Zeller said:

The wife has to get at least some of PS contribution, otherwise her comp wouldn't be included in the calculation of the deductible limit.

Good point, CB.  I knew we kept you around for a reason.

 

[Basically]

BG, he gave me last year's comp and deferral numbers and said this year would be very much the same.  He is thinking he wants a larger PS contribution to get a better corporate deduction.

Hmm, I knew that when calculating the maximum contribution you don't include the CU to pass the 415 limit when there is plenty of compensation, but I didn't know you could exceed the compensation limit boundary by the CU

I figured (if she is only deferring 22,500) - 

 30,000 compensation
-22,500 salary deferral
    7,500 profit sharing

But what you are telling me is take out the CU all together and then back into the PS contribution.  And if she maxes out it would look like this - 

26,000 salary deferral
  7,500 profit sharing (25% of 30K comp)
33,500   <- total can exceed her total compensation?

His contribution calculation is the same.  Max deferral + 25% PS 

As I stated at the top, his goal is to get the largest corporate contribution deduction.  This makes that happen without any worries, right?

The plan design is a pro-rata PS.  Very vanilla.  I never understood how to sway contribution amounts in one participant's favor.  An integrated at TWB formula does that but in this case he does not have enough compensation.  X-tested with everyone in their own group? Is that how most people design their all around plans?

 

[C. B. Zeller]

41 minutes ago, Basically Green said:

33,500   <- total can exceed her total compensation?

Yes.

Really the right way to think of it is that you take the participant's total annual additions, and compare it against their 415 limit to see if they pass the test. In this case her annual additions are $19,500 + $7,500 = $27,000. Her 415 limit is the lesser of 100% of comp or $58,000, which is $30,000. $27,000 is less than $30,000, so the 415 test is satisfied.

Another thing that can happen is, let's say that she only deferred $10,000, and the employer decided to give her a $25,000 profit sharing allocation (ignoring the deductible limit for now). Since $10,000 is less than the 402(g) limit, none of it has been reclassified as catch-up at this point. $10,000 + $25,000 is $35,000, which is more than her 415 limit. One of the ways of correcting a 415 excess is to reclassify the excess as catch-up, if the participant is eligible. So in this situation, $5,000 of her deferrals would be reclassified as catch-up and she would still get the full $25,000 employer contribution.

41 minutes ago, Basically Green said:

X-tested with everyone in their own group? Is that how most people design their all around plans?

Yes.

Even if the plan does not need to be tested, such as your case that covers no non-HCEs, this is still the preferred way to design the plan, as it gives you the most flexibility in allocating contributions. A common misconception is that you are required to cross-test with this plan design - you are not. You can still do a pro rata allocation, which would satisfy nondiscrimination testing on an allocations basis.

[BG5150]

38 minutes ago, Basically Green said:

X-tested with everyone in their own group? Is that how most people design their all around plans?

We do this for all our plans.  Offers most flexibility.

Pro-rata, integrated (only at TWB) allocations under this method both pass on contributions basis.  If you want to integrate at a different level you will need to pass nondiscrimination testing.

Be aware of your firm's pricing policy.  A lot of firms I worked at/with charge more when there is a non-safe harbor formula in the doc, regardless of whether the client issues a profit sharing that requires cross testing.

 

[Basically]

CB, what you are saying is that an employee can defer less than the 402g limit and some (if not all) can be classified as catchup?   And by re-classifying it you can play around to pass the 415 test.  

BG, 3 questions:

1.  A X-tested plan can still be a SH plan, correct?
2. With the Cycle 3 restatement deadline this coming July would it be advised to maybe restate all plans from SH 401(k) or straight PS over to a X-tested SH 401(k) or X-tested PS?
3.  Do firms charge more for X-testing?  FT William compliance software performs the X-testing.  

[C. B. Zeller]

Not exactly. Deferrals can only be reclassified as catch-up when a limit is exceeded. And there are only 4 limits that can be exceeded to cause a deferral to be reclassified as catch-up. Those limits are:

• 402(g) limit
• 415 limit
• a plan-imposed limit
• the maximum allowed under the ADP test (meaning, excess contributions that would otherwise be refunded due to a failure of the ADP test can be reclassified as catch-up instead of being distributed)

So what I am saying is that if there are other contributions that would cause the participant to exceed the 415 limit, then some of their deferrals can be reclassified as catch-up.

I'll jump in on your questions for BG too, hope he doesn't mind:

1. Yes

2. Maybe, but not without discussing it with the client first. If the plan does not have a last day requirement to receive an allocation of profit sharing, you can not generally change the allocation formula during the current year. In other words, if you are changing the formula, it can't be effective earlier than the first day of the next plan year.

3. No comment here, except to say that we should avoid discussing specific firms or fee structures on this board.

[BG5150]

^ I agree

[Basically]

#2,  for plans that DO impose a last day requirement, as long as that is the case you can amend mid year?  The plans that I am handling I intend to restate in early 2022 to meet the 7/31/2022 restatement deadline.  Should be no problem (if the client agrees) to move to a X-tested plan for more flexibility?

Ya, #3 gets into how other business' operate.  

Appreciate the help.

[BG5150]

I believe you can amend the profit sharing allocation mid-year if there is a last day requirement because no one yet has definitely accrued the right to share in the allocation.

You will be fine to amend prospectively into 2022 to the grouping method.

However, if you have plans with no allocation conditions for PS (I have several), then they will have to be signed prior to 1/1/22 to allow the change.

Friendly advice:  make sure you know what you are doing in/re cross testing.  Just because FT William does the testing, doesn't mean you can just rely on the Pass/Fail results.  It takes art and skill, sometimes, to decipher the nuances of the reports.  And art and skill to "correct" a failed test to conform to the client's aims.  You just don't keep throwing in 1/2 percents until the tests pass...