100% Match.... how much can be contributed?

[Basically]

OMG some clients just don't get it.    This guy is generous.  He wants to match everyone's deferral dollar for dollar.  But I don't think it will work.  

He only earns $67,000.  He deferred $27,000 so he wants a match for himself equal to that $27,000.  That doesn't work... does it?  I've got so many numbers bouncing around in my head.  What is the max that he can get?  Flat out 25% of 67,000 or $16,750?  Total deposit for him would be $43,750?  Is there any way to get him what he wants?

 

Thansk

[Lou S.]

You can match 100% of deferrals as long as you don't exceed 415 there is nothing in the code or document rules that would prohibit it from a compliance stand point.

It's the deduction limit that might get you into trouble but that 25% of all compensation so if there are a lot of employees eligible not deferring much it might work.

Oh and ACP testing is likely to be a big problem as well as you're likely to have trouble passing ACP with the owner getting a ~40% match (I'm assuming this guy is the owner). So unless you have a lot of HCEs deferring 0%your ACP test is likely to fail miserably. You are probably going to have trouble with ADP testing as well unless this a safe harbor plan in which case only ACP is going to be an issue.

Now if he's the only ee, you are right with the 25% er contribution + 401(k) as his effective maximum.

[Belgarath]

What Lou said. And an enhanced ACP safe harbor match, while theoretically possible to get to the 27,000 match using an ACP safe harbor match formula of 671% (app) of deferrals up to 6% of compensation, would be most unlikely to make the client happy - giving way more to the NHC than he would normally want to!

[Basically]

Here is the skinny -

Plan is a 6% SH Match, company match, (and I always make the ER a pro rata discretionary NEC)

Owner A -  $67K Comp, $27K Def
Owner B -  $67K Comp, $27K Def

EE1 - $39.5K Comp, $1,825 Def
EE2 - $8,525 Comp, $725 Def (Term during year)
EE3 - $39K Comp, $2,000 Def

Owners are husband and wife.  The plan only matches deferrals and they wanted to match everyone's deferrals 100%.  Obviously the owner misunderstood the Safe Harbor design and how it worked.  But is there a way to make it work?

 

[Belgarath]

Depends on what you mean by "make it work." As Lou said, the 25% deduction limit kills it right there. The 25% deduction limit with the total compensation given is only $55,256. IMHO, no way can you get the owners to an employer contribution of $27,000 each and pass nondiscrimination testing. Unless they can take salaries that are way higher, so their percentages are way lower...

Personally, I think the best you can do is to find out how much they are WILLING to give the NHCE's, and work backwards from there to come up with the most efficient maximum, within the constraints of the document and coverage/nondiscrimination results. And consider what plan design changes might be beneficial, again, within the constraints of coverage, nondiscrimination, and the allowable timing of any amendments. Talk to an actuary about pairing with a DB plan - I'm no actuary, so I don't know what might be possible.

[Jakyasar]

1 hour ago, Basically said:

Here is the skinny -

Plan is a 6% SH Match, company match, (and I always make the ER a pro rata discretionary NEC)

Owner A -  $67K Comp, $27K Def
Owner B -  $67K Comp, $27K Def

EE1 - $39.5K Comp, $1,825 Def
EE2 - $8,525 Comp, $725 Def (Term during year)
EE3 - $39K Comp, $2,000 Def

Owners are husband and wife.  The plan only matches deferrals and they wanted to match everyone's deferrals 100%.  Obviously the owner misunderstood the Safe Harbor design and how it worked.  But is there a way to make it work?

 

25% deduction based on above is 55.25k, owners getting 54 leaves only 1.25k which clearly exceeds ee total of 4.5k therefore fails deduction.

Not even going there with the ACP test as Lou said.

[Bri]

Well they could take the rest of the deduction on the 2023 return (if depositing after year end) and hopefully fix the problem so they can still get the rest of their 2023 allocations to fit under their deduction limit for 2023.

[C. B. Zeller]

Also keep in mind that the deduction limit is only a limit on the amount that can be deducted; if any of the match is funded from forfeitures, that still counts as an allocation for the ACP test and the 415 limit, but it doesn't count towards the deduction limit.

[Basically]

Nope... most of the money was deposited in 2022.

Looking at each employee starting with the NHCEs - 

EE1 deferred 4.62%
EE2 deferred 8.5%
EE3 deferred 5.1%

Does it work like this :

The SH Match is 6% so EE1 and EE3 would be matched - Done.  EE2 would receive a 6% SH match + a 2.5% company match

The 2 owners each deferred 40%.  They could receive the 6% SH match + 19% company match which would mean that we would need to return $10,250.

I'm sure I'm missing something.  Would that work, fix the problem?

[Paul I]

Is the business a corporation, are the husband and wife considered self-employed (sole proprietor, partnership)?  If they are self-employed, is their $67,000 in compensation before or after taking into account contributions to the plan?  The answer could add yet another layer of complications.

If the stick with the basics of deferrals and a safe harbor match, then the employees and owners would only get the 6% SHM.  If there are no other eligible employees and the owner wants to give the employees more, then use the discretionary NEC you built in to provide the extra contributions.  It won't come out exactly like giving everyone a 100% match, and the owners won't get a 100% on all of their deferrals, but it is clean and they can close out 2022.  They can play with plan design for 2023.

Frankly, the owners may wind up better off under this scenario after factoring in all of the corrective actions that will be needed to pass ACP testing on the additional match for 2022, trying to stay within the deduction limits, flowing all of this through business and personal tax returns, and paying the associated administrative fees.