401(k) plan offered by payroll service combined with existing cross-te

[David MacLennan]

I have a client with a cross-tested PS plan. He wants to adopt a 401(k) plan for his staff using a plan offered by his payroll service. I specialize mainly in DB plans and don't want to do any 401k administration (my eyes glaze over with the mention of 401k issues, in the same way that others often do for DB plan topics). I would like to continue doing the X-tested PS plan admin.

Would it be advisable (or ill-advised) to have 2 plans, the 401k offered by the payroll service and the existing cross-tested PS plan? Seems the payroll service 401k could have a 3% non-elective to satisfy the safe-harbor and top-heavy needs, allowing the 401k plan to stand alone more easily and work together with the existing cross-tested plan.

I presume the payroll service 401k uses a standardized document. With 2 plans, the standardized prototype 401k offered by the payroll svc would no longer qualify for reliance on the opinion letter, so it would have to be submitted to the IRS. Comments?

Has anyone had bad/good experience with a payroll service 401k that I can pass along to my client as a precaution?

Any thoughts/comments on this would be appreciated.

[rcline46]

OHHHHH David, are you sitting down? The 401(k) must be part of your crosstesting. So you will need deferrals, match, safe harbor contributions. If you are using accrued to date you will need 401(k) balances. Of course the 404 15% limit you know (gross pay less deferrals less 125 etc) times 15%, reduce by 401(k) to get your PSP amount.

The Safe Harbor if 3% can be used in cross testing as long as integration is not imputed on it. This means a spread sheet to add different pieces together - 401(K) plus SH plus (PSP with integration) for ABPT, drop the 401k but keep SH for rate group test.

And you are getting what to do the cross tested plan? Better increase it!

[richard]

Adding a 401(k) plan is often needed because the client wants it as a benefit for their employees A situation we often face is with an existing cross tested profit sharing plan, and the client asks "why can't I have a 401(k) plan? My employees want it. etc."

Our solution is to suggest they adopt a 401(k) plan with no company match. That way, there is no cost to the company, other than for administration/recordkeeping. We'll do (if asked) the ADP test (since there is no match, it's easy), and the 5500 (for a fee). Since the motivating factor behind the 401(k) plan is to offer something for the rank-and-file employees, I usually can convince the HCEs not to push the ADP limits. (Besides, with the look-back rule for ADP testing, it's usually no problem.)

And with 401(k) deferrals floating around, that can mean that the plan's are not top-heavy, and that the 401(a)(4) testing is easier to pass.