Redesigning plans - sharing thoughts

[Jakyasar]

To the gurus out there, what do you think for the following:

CB/DC combo, husband and wife, each owning their own companies with children under age 21.

Currently wife takes salary under husband's company thus keeping controlled group. There is no ASG issues as they do totally different stuff.

Husband makes very high salary but wife's income is low. They both defer maximums.

Husband hires an employee who does not want to defer. Plan fails 410b miserably unless the employee gets a high % of contribution which is not quite cost effective. Another option is to reduce the wife's deferral by 40%+.  

Here is a thought I have for 2027 as 2026 is late (the options will be discussed with the client)

1. Stop paying the wife from husband's company i.e. break up the controlled group for 2027. So she becomes a terminated participant in both plans as of 1/1/2027.
2. The wife already has a benefit in the CB plan and also a balance in the DC plan. May decide to leave the monies in the accounts.
3. Wife starts a new CB and 401k plan separately under her own company effective 1/1/2027.
4. As this is a separate company with no ASG and CG issues effective 1/1/2027, the wife's new CB plan will have no benefit offset from prior CB plan as it was sponsored by husband's company as she was a participating employer - I am not sure this is true as her company was funding her portion under the husband plan.
5. Yes, there will new plan costs but this way she can maximize her deferrals and also keep everything separate, subject to their approval.
6. They can reduce the contributions to the employee and still maintain maximum deferrals.

Am I thinking straight on this?

 

[CuseFan]

As part of the control group you say the wife's company was a participating employer in the plans. Terminating her employment in husband's business may end the control group but then you have multiple employer plans unless you also end her company's participation in the plans. I think she has an aggregated 415 limit in any new CBP but on that I'm unsure, you'll need to check which and how attribution rules apply to 415 control group. 

I agree with your thought process, just need to close the loop entirely on her business's participation in the plans and verify the new CBP 415 concerns.

[Jakyasar]

Wife would definitely sever the joinder agreement to avoid multiple employer issues and that is why she was getting a salary to keep the CG alive since there is no more kids attribution for ages under 21.

Still not clear about the combined 415 limit when she starts her own DB plan especially when her company, under CG, was funding the DB portion.

I think 415 combined limit applies here as her benefits were not provided/funded by husband company. Her benefits are still under her own company.

Never encountered this before but logic dictates the combined limit but not sure.

[David D]

I will assume you mean the high contribution requirement is to pass 401a4, not 410b.  You will need to make the 401k safe harbor so the owner can continue to defer and bring the new employee in the cash balance plan for 401a26 if not already eligible for it.  If the spouse is taking low comp, then the CB plan will have a low comp 415 limit, so not sure that will be worth the added expense. Also, i seem to remember something in 415 about about a formerly affiliated plan when looking at limits.

[Artie M]

i am guessing they are failing the 70% ratio percentage test under 410b because new employee not befitting in CB or PS plans.  That means they have to run the average benefits test to attempt to salvage the plan. The ABT lumps every single dollar together and divides by each person's comp.  Because wife has low salary but is maxing out deferrals and CB/PS contribs her benefit percentage will be astronomical (e.g., $60k contributions / $60 comp = 100%).  So because the wife's 100% rate makes the HCE average sky high, you chop the deferral by at 40% just to artificially lower the HCE average to try to squeeze through the ABT.

OP's idea is better and doable under the new SECURE 2.0 rules because if done properly W would disappear from H's testing pool.   Question is how much would a x% safe harbor /PS contribution to the new employee cost in $ compared to the tax deductions lost by cutting W's deferral.  E.g., if new employee makes $50k, a 5% contribution costs $2500 where cutting the wife's deferral by 40% reduceed household taxable savings by maybe $10-15K.  So maybe paying more in taxes than it would cost to just give the employee small contribution.  So model the split, shift the payroll, add SH to H's plan may work better ... like you are contemplating.

415 is aggregated but spousal attribution alone does not combine 415 limits, right... Each will maintain separate 415 limits unless the two companies remain in a single controlled group and maintain plans sponsored by that same controlled group.  Once you meet the SECURE 2.0 spousal exception, the two companies are severed.  H's 415 limits are calculated on salary from H company and W's 415 limits are calculated strictly on the salary from W company.  I guess you have to watch out for the 100% of comp for W, if the comp W company can pay is limited.  So ensure W's standalone income is enough.  Also watch the the 404a7 DB/DC combined deduction limit.  Perhaps have the tpa run the 415 and 404a7 limits based on W net income/w2 from W's company and don't forget her age (to estimate CB cap).

I would think the split should be timed for 12/31/26 to start new year off clean.

Again, just rambling