In a new comparability plan, is it improper to define the classes by s

[AndyT]

Can classes be defined like this?:

Class 1: Participants making between 20,000 - 25,000

Class 2: Participants making between 15,000 - 24,999

etc.

Also, with the proposed Regs, it appears permissible to carve out classes of employees and exclude them from the profit sharing contribution altogether (write them out of the plan), since the Regs do state any leeway with the 1/3 / 5% gateway.

Would this design work under the proposed Regs?:

All employees making over $25,000, except for Owners and Officers, are excluded from the profit sharing contribution. Class 1 includes Owners and Officers. Classes 2 and on are broken down by compensation ranges like shown above.

What do you think? Is it too aggressive?

[Guest TracyAndrews]

As long as properly documented in the allocation section of the Document, I have seen this done before. In addition to the regular 401(a)(4) tests, it is also important to make sure you are passing the coverage test when you put those participants in a zero % rate group. You may have a problem in future years if too many employees move into that salary range. Sure it is a bit aggressive, you just have to make sure that no one making $25,000 talks to anyone making $24,000!

[AndyT]

Tracy, thanks for your reply. Do you think amending the plan every other year or so (maybe every year) to adjust the salary ranges for inflation increases creates any problems?

[Guest TracyAndrews]

Perhaps stating initially in the document that there will be a defined COLA for the rate groups, instead of actually redefining the groups, therefore no need to amend year to year. (Could get costly with determination letters)...Just a thought, however I have NOT seen that in a document.

[Richard Anderson]

In TracyAndrews' post "it is also important to make sure you are passing the coverage test when you put those participants in a zero % rate group."

Under the proposed regs. I don't think you can have a zero% rate group. The gateway compares the lowest NHCE allocation to the highest HCE allocation. Therefore, an eligible NHCE could not get a zero% allocation unless no HCE received an allocation. Andy Treece is correct, these employees would have to be excluded from the plan entirely.

Personally I think this is too aggressive, because the intent of the proposed reg. is to limit the range of skewing in favor of HCEs by insuring a minimum to NHCEs. This plan design is one way to bypass that intent. If we think up ways to bypass the intent of these regs, I think we can except more regs.

[AndyT]

Richard,

What concerns you the most - writing classes out of the plan or having the classes defined by salary ranges?

My editorial: As long as the tax code remains this complicated and inherently unjust by punishing higher incomes, I am going to do my best to find creative ways within the law to create tax deferral for those who want it.

BTW, I personally am an NHCE, so I am not biased. :-)