New Comparability Profit Sharing - Selective 'Groups'

Development company with around 50 employees in California. All of the employees would be considered NHCEs as none of them have any company equity and do not make more than $120k (Besides the CEO). All other employees would be NHCE because of this. Would like to set up a new comparability profit sharing program where the employees who did well on their projects (All NHCE) can be set to one "group" on the new comparability profit sharing plan and have the highest % rate. The HCE (CEO) would be set to the lowest % rate (1%) and thus, the remaining other employees would meet the gateway test if they were set as 0.35% (1/3 of HCE). Would this setup satisfy the cross-testing requirements along with any other requirements? Basically looking for a method to utilize profit-sharing but provide as much % possible to the employees excelling at their projects and providing as close to 0 as possible for other remaining employees (Which would include the CEO). Any advice would be appreciated!

Thinking there may be something in regards to the broadly available allocation rate method as well since the employees I would like to allocate the higher % would be working specific job sites. The whole point of this is to cater a higher % to specific employees who excel at their job sites. Because the broadly available allocation rate method allows for different % rates on nondiscriminatory groups in different locations. The different locations portion would work since we could specify the job site being different? Odds are there will be some jobs that do not require the employees to stay at that job site for the full year though so not sure if that would be an issue.

If this isn't a SH Nonelective plan, the poorly performing people do not need to get anything at all.  As long as you are passing coverage and nondiscriminaiton testing.

@BG5150Thank you for responding! I'm a novice in the 401k world so was wondering if you can help me better understand the passing coverage and nondiscrimination testing portion. At a rough glance from the situation I explained, do you see any glaring points that would have this setup fail the test? It shouldn't be an SH nonelective plan from what I understand. I'll also look into it on my end so thank you for the great information.

So to provide more details. It turns out there is 1 employee besides the CEO that makes above the $170k amount. So we would actually have 2 HCE and the rest of employees as NHCE. I was under the impression that regardless of SH nonelective or not, we are required to pay a minimum of 5% or 1/3 of the HCE's %. Would this not be the case? If not, then it seems like we can just set the two HCE in group A, the NHCE employees we'd like to provide the highest % to in group B, and the remaining NHCE employees in group C. The most ideal situation would be to keep groups A and C at 0% or something close to that, and set a higher % for group B. The only concern is if this would pass coverage and nondiscrimination testing as you mentioned. Any clarification or corrections on what I've mentioned would be greatly appreciated. Thank you!

You are over thinking it.0% groups a and c. No gateway. Passes all tests.

@Mike PrestonThat is great news since I was confusing myself more at this point. So I can leave groups A and C at 0% and just handpick the employees who excelled in their projects to group B and call it a day? I'm a bit confused on how this would pass all tests? Did you mean no gateway as in no gateway test is needed? Sorry if these are horrible questions, I'm very green to this so I'm looking up all these terms and tests as it is mentioned on here. Thank you as always for the information!

12 minutes ago, thatguyfromHR said:

@Mike PrestonThat is great news since I was confusing myself more at this point. So I can leave groups A and C at 0% and just handpick the employees who excelled in their projects to group B and call it a day? I'm a bit confused on how this would pass all tests? Did you mean no gateway as in no gateway test is needed? Sorry if these are horrible questions, I'm very green to this so I'm looking up all these terms and tests as it is mentioned on here. Thank you as always for the information!

You need to align yourself with a good TPA who can explain everything to you.

@Mike PrestonWill do! Thank you for pointing me in the right direction.

Like the others have said - you are overthinking it. With each person in their own group, as long as the tests pass you can give each person a custom amount. 

If you decide one year that you really like the employees with purple hair, and those are the ones who get the $$ then that's what you do. In a different year if you decide you really like the the employees who drive hatchbacks, and those are the ones that you want to give $$, then that's what you do. In another year, if you decide you really like all the employees name DAVE, and want to give them $$, then you do!

It's really that simple. 

If group C is more than 30% of the NHCE and they get nothing, and they otherwise satisfy the conditions to receive a PS, then you fail coverage.

Note: remember these groups are artificial constructions.  Everyone is considered separately, you so can give everyone a different rate as long as you are passing the testing.

And don't forget you still have to pass nondisrimination testing.  If the owner is a lot younger than a bunch of the staff, it'll be difficult to pass the test with palatable contributions to the NHCE.

5 hours ago, BG5150 said:

If group C is more than 30% of the NHCE and they get nothing, and they otherwise satisfy the conditions to receive a PS, then you fail coverage.

Note: remember these groups are artificial constructions.  Everyone is considered separately, you so can give everyone a different rate as long as you are passing the testing.

And don't forget you still have to pass nondisrimination testing.  If the owner is a lot younger than a bunch of the staff, it'll be difficult to pass the test with palatable contributions to the NHCE.

Did you miss the fact that in this construct nobody is receiving any benefits if they are an h c e?

23 hours ago, thatguyfromHR said:

The HCE (CEO) would be set to the lowest % rate (1%) and thus, the remaining other employees would meet the gateway test if they were set as 0.35% (1/3 of HCE)

This is what I was basing my comments on.

20 hours ago, thatguyfromHR said:

The most ideal situation would be to keep groups A and C at 0% or something close to that, and set a higher % for group B.

But now I see he said this.

Conflicting info.  Or did he really mean the non-CEO HCE would get 0%?

1 minute ago, BG5150 said:

This is what I was basing my comments on.

It is my understanding that this was later modified such that the hces received nothing.

Just now, BG5150 said:

But now I see he said this.

 

Conflicting info.  Or did he really mean the non-CEO HCE would get 0%?

I think so. But I'm not going to quote from multiple messages to see how we got there.

My very first post about coverage and testing was based on the OP.  Didn't realize the premise had changed.

5 minutes ago, BG5150 said:

My very first post about coverage and testing was based on the OP.  Didn't realize the premise had changed.

Understood. Maybe your penance is answering the  original request for a tutorial on all things discrimination? 😁

43 minutes ago, Mike Preston said:

Understood. Maybe your penance is answering the  original request for a tutorial on all things discrimination? 😁

Now that's funny!!

55 minutes ago, Mike Preston said:

Understood. Maybe your penance is answering the  original request for a tutorial on all things discrimination?

That's more of a sentence than a penance.