New Comp Basics

[LarryPensions]

Apologize in advance for the rudimentary questions, have already tried searching previous threads for my answers. 

In my limited understanding when doing new comp, my goal is to maximize the HCE's total contributions. The remaining gateway to eligible NHCE is the lesser of 5% of comp or 1/3 of the highest allocation percentage of an HCE.

Upon 401(a)(b) failure, is it in my best interest to allocate more to the elder NHCE's? If so is there a general formula to achieve the correct amount?  In my experience the 401(a)(b) seems really finicky and feels almost arbitrary at times. Once again I'm sorry if this isn't the correct place to ask, my previous resources weren't helpful for me.

[Bird]

Generally speaking, you would want to give more to the younger NHCEs as you get more bang for your buck that way. New comp testing projects contributions today to benefits tomorrow (at retirement) so the time value of money gives higher benefits to a younger person, all things being equal.  Specifics depend on demographics.

[LarryPensions]

Thanks, Bird. At that point, am I just using my best guess on the proper amount to increase the younger NHCEs until it passes? Or is there a more efficient way I can find the correct amount?

[Bri]

You can do the algebra and solve it out perfectly, but trial and error generally works fine for one person.  And then they'll end up with a nice round number like $2,000 because it was way too much work to math out the actual 1,992.73 you might have really only needed to allocate.

[BG5150]

it might take more than one person...

If you are trying to satisfy the rate group test, then you need to get the right number of people into the HCEs rate group; enough to get that group to pass.  That, to me, is as much art as it is science.

If you are using the ABT, then, I guess you can get one person's EBAR high enough to get the group's average up, but I found that increasing a few people just a little bit might be better than giving one person an out-sized allocation.

(eg:  would you rather give one person making $30k a $1,000 contribution or 3 people making that amount $333?)

[Jakyasar]

Before allocating to others, one advice would be to have an input from the plan sponsor. You may choose someone because the math favors them but plan sponsor may not be happy about. Be watchful of the BRF issues as well.

Also, when you say maximizing HCE's, you meant owners, correct?

Bird/Bri and BG have excellent points.

[AKowalski]

What is a "401(a)(b) failure"? Do you mean 401(a)(5)(B)?