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4/13/2018
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Compliance Coordination
Kim Martin, APA, CPC, QPANIPA, Education Director
Bates & Company, Inc., Account Executive
2
Compliance Tests
Elective Deferral Limits
ADP & ACP Tests
414(s) Compensation Test
Top-Heavy Minimum
415 Limit
Minimum Coverage Test
401(a)(4) Test
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3
Interplay of Design & Testing
1,000 hours & last day
410(b)
401(a)(4)
Top heavy
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Plan Design #1 – Safe Harbor 401(k) ABC Company 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility: Age 21 and 1 YOS (1,000 hours)• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: None• Safe harbor contribution: Basic match to all eligible participants• Additional match: None• Discretionary nonelective: Pro rata ($0)• Nonelective conditions: None• Top-heavy minimum: Non-key employees employed on last day of year
Note: The plan is top-heavy
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Plan Design #1 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
DeferralsBasic
MatchProfit
SharingTotal
Allocations
HCEs
Amy $300,000* $18,500 $11,000 $0 $29,500
Bert $25,000 $24,500 $1,000 $0 $25,500
NHCEs
Carol $75,000 $4,500 $3,000 $0 $7,500
Dee $40,000 $800 $800 $0 $1,600
Ed $25,000 $0 $0 $0 $0
* Limited to $275,000
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Plan Design #1 – Safe Harbor 401(k)
• Elective deferral limit (IRC §402(g))• Statutory dollar limit on the amount of elective deferrals a participant may
exclude from gross income during the calendar year
• 2018 deferral limit = $18,500
• Catch-up contributions (IRC §414(v))• Must be 50 or older by the end of the calendar year
• Deferrals are classified as catch-up contribution when
• Plan limit is exceeded, or
• Statutory limit is exceeded (§402(g), §415, ADP test)
• Optional provision; document will state if permitted
• 2018 catch-up limit = $6,000
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Plan Design #1 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals
HCEs
Amy $275,000 $18,500
Bert (51) $25,000 $24,500
NHCEs
Carol $75,000 $4,500
Dee $40,000 $800
Ed $25,000 $0
Elective Deferral
Limit:
Deferral = $18,500Catch-up = $6,000
8
Plan Design #1 – Safe Harbor 401(k)
• ADP test exemption (ADP safe harbor)• Fully vested employer contribution to all eligible NHCEs
• Basic matching contribution
• 100% of first 3% of compensation deferred + 50% of next 2% of compensation deferred
• Enhanced matching contribution
• At each level of deferral must be ≥ match under basic formula
• Level of match isn’t higher for HCEs than NHCEs at same deferral rate
• Match rate can’t increase as deferral rate increases
• Nonelective contribution – at least 3% of compensation
• No allocation conditions permitted
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Plan Design #1 – Safe Harbor 401(k)
• ACP test exemption (ACP safe harbor)• Matching contribution limitations
• Elective deferrals > 6% may not be matched
• Match rate can’t increase as deferral rate increases
• Level of match isn’t higher for HCEs than NHCEs at same deferral rate
• Discretionary match is limited to 4% of compensation N/A
• No allocation conditions permitted
• Vesting is allowed
10
Plan Design #1 – Safe Harbor 401(k)
• Top-Heavy Exemption• Plan consists solely of elective deferrals and safe harbor contributions
• No profit sharing contributions
• No forfeiture allocations
• Determined on a year-by-year basis
• Plan provision vs. allocation
• Additional amount to fund top-heavy minimum for Dee and Ed is not required
Non-KeysW-2
WagesBasic
Match% of
Comp
Carol $75,000 $3,000 4%
Dee $40,000 $800 2%
Ed $25,000 $0 0%
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Plan Design #1 – Safe Harbor 401(k)
• IRC §415(c) limit• Limits the maximum “annual addition” that can be allocated to a
participant each limitation year to the lesser of:
• Compensation limit – 100% of 415 compensation, or
• Dollar limit – $55,000 (indexed for 2018)
• Annual additions:Include:
• Elective Deferrals
• Designated Roth contributions
• Employer contributions
• Forfeitures
Do not include:
• Catch-up contributions
• Investment earnings
• Loan repayments
• Rollovers/transfers
12
Plan Design #1 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
DeferralsBasic
MatchAnnual
Additions415
Limit
Amy $275,000 $18,500 $11,000 $29,500 $55,000
Bert $25,000 $18,500 $1,000 $19,500 $25,000
Carol $75,000 $4,500 $3,000 $7,500 $55,000
Dee $40,000 $800 $800 $1,600 $40,000
Ed $25,000 $0 $0 $0 $25,000
415 Limit:
No participant exceeds their 415 limit
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Plan Design #1 – Safe Harbor 401(k)
401(k) Plan
401(k) portion
All nonexcludable
NHCEs benefiting
401(m) portion
All nonexcludable
NHCEs benefiting
401(a) portion
No HCEs benefiting
Mandatory Disaggregation under Minimum Coverage
Test:
14
Plan Design #1 – Safe Harbor 401(k)
• Nondiscrimination test• Relationship of the IRC §410(b) minimum coverage rules to the
nondiscrimination rules of IRC §401(a)(4)
• Requirements designed to work together
• Nondiscrimination rules and coverage rules use the same definition of “plan”
• After application of disaggregation
• 401(a)(4) – no profit sharing allocation
• 401(k) – ADP test deemed satisfied
• 401(m) – ACP test deemed satisfied
Coverage “Plan”
Nondiscrimination “Plan”
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Plan Design #2 – Safe Harbor 401(k) ABC Company 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility – deferrals: 3 months of service• Eligibility – safe harbor: Age 21 and 1 YOS (1,000 hours)• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: None• Safe harbor contribution: Basic match to all eligible participants• Additional match: None• Discretionary nonelective: Pro rata ($0)• Nonelective conditions: None• Top-heavy minimum: Non-key employees employed on last day of year
Note: The plan is top-heavy
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Plan Design #2 – Safe Harbor 401(k)
Participants YOS?W-2
WagesElective
DeferralsBasic
MatchProfit
SharingTotal
Allocations
HCEs
Amy Yes $300,000 $18,500 $11,000 $0 $29,500
Bert No $25,000 $24,500 $1,000 $0 $25,500
NHCEs
Carol Yes $75,000 $4,500 $3,000 $0 $7,500
Dee Yes $40,000 $800 $800 $0 $1,600
Ed No $25,000 $0 $0 $0 $0
Note: NHCEs are non-key employees, and all are employed on the last day of the plan year.
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Plan Design #2 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals
HCEs
Amy $275,000 $18,500
Bert (51) $25,000 $24,500
NHCEs
Carol $75,000 $4,500
Dee $40,000 $800
Ed $25,000 $0
Elective Deferral
Limit:
Deferral = $18,500Catch-up = $6,000
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Plan Design #2 – Safe Harbor 401(k)
• Dual (split) eligibility• Otherwise excludable employees
• Have not met statutory eligibility requirements
• Eligible to participate
• Not covered by safe harbor
• Separate ADP/ACP testing
Statutory participants (“Plan #1”)
• Covered by safe harbor• Exempt from ADP/ACP tests
Otherwise excludable employees (“Plan #2”)
• Not covered by safe harbor• Subject to ADP/ACP testing
Safe harbor 401(k) plans cannot use early participation rule
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Plan Design #2 – Safe Harbor 401(k)
Participants YOS?Elective Deferral
ADP Test
ACP Test
Plan 1 – Exempt from ADP/ACP tests:
Amy (HCE) Yes $18,500 6.73% 4.00%
Carol (NHCE) Yes $4,500 6.00% 4.00%
Dee (NHCE) Yes $800 2.00% 2.00%
Plan 2 – Subject to ADP/ACP tests: Fail
Bert (HCE) No $18,500 74.00% 0%
Ed (NHCE) No $0 0% 0%
ADP & ACP Tests:
Deemed satisfied
20
Plan Design #2 – Safe Harbor 401(k)
• Failed ADP Test• Excess contribution = $18,500 (fully attributed to Bert)
• Catch-up contribution =
• Correction options
• Corrective distribution to Bert = $18,500 plus allocable earnings
• Corrective QNEC to increase NHCE ADP
• No related matching contributions
Catch-up limit $6,000
402(g) excess ($6,000)
Remaining amount $ 0
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Plan Design #2 – Safe Harbor 401(k)
401(k) Portion
Statutory Employees – Safe
Harbor PlanCoverage Test
Otherwise Excludable
Employees Plan
Coverage Test
ADP Test
(Applies similarly to 401(m) portion and ACP test.)
22
Plan Design #2 – Safe Harbor 401(k)
401(k) Portion
Statutory Employees
All nonexcludable
NHCEs benefiting
Otherwise Excludable Employees
All nonexcludable
NHCEs benefiting
401(k) & 401(m) Minimum
Coverage Tests:
401(m) Portion
Statutory Employees
All nonexcludable
NHCEs benefiting
Otherwise Excludable Employees
No HCEs benefiting
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Plan Design #2 – Safe Harbor 401(k)
• Dual (split) eligibility• Top-heavy exemption is not available
• Exemption requires whole plan to satisfy the safe harbor rules
• Definition of “plan” for top-heavy purposes is different than for coverage and nondiscrimination
• Cannot separately test statutory and otherwise excludable employees for top-heavy purposes
• See Revenue Ruling 2004-13
• If otherwise excludable employees are not covered by safe harbor →
whole plan subject to top-heavy rules
24
Plan Design #2 – Safe Harbor 401(k)
Top-Heavy Minimum:
Non-Keys YOS?W-2
WagesBasic
MatchTop-
Heavy
Carol Yes $75,000 $3,000 $0
Dee Yes $40,000 $800 $400
Ed No $25,000 $0 $750
Additional contribution to satisfy top-heavy
minimum
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Plan Design #2 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
DeferralsBasic
MatchTop-Heavy Minimum
Annual Additions
Amy $275,000 $18,500 $11,000 $0 $29,500
Bert $25,000 $18,500 $1,000 $0 $19,500
Carol $75,000 $4,500 $3,000 $0 $7,500
Dee $40,000 $800 $800 $400 $2,000
Ed $25,000 $0 $0 $750 $750
415 Limit:
No participant exceeds their 415 limit
26
Plan Design #2 – Safe Harbor 401(k)
401(a) Minimum Coverage & Non-
discrimination Tests:
ParticipantsW-2
WagesTop-
Heavy % of
Comp Benefiting?
Amy (HCE) $275,000 $0 0% No
Bert (HCE) $25,000 $0 0% No
Carol (NHCE) $75,000 $0 0% No
Dee (NHCE) $40,000 $400 1% Yes
Ed (NHCE) $25,000 $750 3% Yes
Tests are met since no HCEs are benefiting under the 401(a)
portion of the plan
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Plan Design #3 – Safe Harbor 401(k) Fred & Company 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility: 6 months of service• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: None• Safe harbor contribution: 100% match on the first 8% deferred • Additional match: None• Discretionary nonelective: Pro rata (3%)• Nonelective conditions: 1,000 hours• Nonelective compensation: Excludes overtime • Top-heavy minimum: Non-key employees employed on last day of year
Note: The plan is top-heavy
28
Plan Design #3 – Safe Harbor 401(k)
Participants1,000 Hours
W-2 Wages
OvertimeElective
DeferralsSH
Match3% ProfitSharing
HCEs
Fred Yes $250,000 $0 $24,500 $20,000 $7,500
Gail Yes $150,000 $0 $24,500 $12,000 $4,500
NHCEs
Hope Yes $50,000 $0 $4,000 $4,000 $1,500
Ian Yes $40,000 $2,000 $1,600 $1,600 $1,140
Jim No $20,000 $2,000 $0 $0 $0
Note: NHCEs are non-key employees, and all are employed on the last day of the plan year.
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Plan Design #3 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals
Fred (55) $250,000 $24,500
Gail (51) $150,000 $24,500
Hope $50,000 $4,000
Ian $40,000 $1,600
Jim $20,000 $0
Elective Deferral
Limit: Deferral = $18,500Catch-up = $6,000
30
Plan Design #3 – Safe Harbor 401(k)
• ADP Test• Enhanced match = 100% of first 8% deferred
• ADP safe harbor met since
• At each level of deferral is ≥ match under basic formula
• Level of match isn’t higher for HCEs than NHCEs at same deferral rate
• Match rate doesn’t increase as deferral rate increases
• ADP test is deemed satisfied
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Plan Design #3 – Safe Harbor 401(k)
• ACP test • Single matching contribution
• Basic match – automatically exempt from ACP test
• Other match formulas – apply ACP safe harbor requirements to determine if exempt from ACP test
• Multiple matching contributions
• Combine to determine if ACP safe harbor is met
• Enhanced match = 100% of first 8% deferred
• ACP safe harbor is not met since elective deferrals > 6% may not be matched
• Matching contributions must be tested for nondiscrimination under ACP test
32
Plan Design #3 – Safe Harbor 401(k)
Participants W-2 Wages SH Match ACR
Fred $250,000 $20,000 8.00%
Gail $150,000 $12,000 8.00%
HCE ACP 8.00%
Hope $50,000 $4,000 8.00%
Iris $40,000 $1,600 4.00%
Jim $20,000 $0 0.00%
NHCE ACP 4.00%
1.25 5.00%
Fail 2x or 2+ 6.00%
ACP Test:
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Plan Design #3 – Safe Harbor 401(k)
• Failed ACP Test• Excess aggregate contribution = $8,000 (fully attributed to Fred)
• No related matching contributions
• Correction options
• Corrective distribution to Fred = $8,000 plus allocable earnings
• Corrective QNEC to increase NHCE ACP from 4% to 6% → 2% QNEC
Participants W-2 Wages SH Match 2% QNEC ACR
Hope $50,000 $4,000 $1,000 10%
Iris $40,000 $1,600 $800 6%
Jim $20,000 $0 $400 2%
NHCE ACP 6%
34
Plan Design #3 – Safe Harbor 401(k)
401(k) Plan
401(k) portion
All nonexcludable
NHCEs benefiting
401(m) portion
All nonexcludable
NHCEs benefiting
401(k) & 401(m) Minimum
Coverage Test:
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Plan Design #3 – Safe Harbor 401(k)
Top-Heavy Minimum:
Non-KeysW-2
WagesEnhanced
MatchProfit
SharingQNEC
Top-Heavy
Hope $50,000 $4,000 $1,500 $1,000 $0
Iris $40,000 $1,600 $1,140 $800 $0
Jim $20,000 $0 $0 $400 $200
Additional contribution to satisfy top-heavy
minimum
The top-heavy exemption does notapply since the plan doesn’t
consist solely of elective deferrals and safe harbor contributions
36
Plan Design #3 – Safe Harbor 401(k)
ParticipantW-2
WagesElective
DeferralsSH
MatchProfit
SharingQNEC
Top-Heavy
Annual Additions
Fred $250,000 $18,500 $20,000 $7,500 $0 $0 $46,000
Gail $150,000 $18,500 $12,000 $4,500 $0 $0 $35,000
Hope $50,000 $4,000 $4,000 $1,500 $1,000 $0 $10,500
Ian $40,000 $1,600 $1,600 $1,140 $800 $0 $5,140
Jim $20,000 $0 $0 $0 $400 $200 $600
415 Limit:
No participant exceeds their 415 limit
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Plan Design #3 – Safe Harbor 401(k)
ParticipantsProfit
SharingQNEC
Top-Heavy
Benefiting?
Fred (HCE) $7,500 $0 $0 Yes
Gail (HCE) $4,500 $0 $0 Yes
Hope (NHCE) $1,500 $1,000 $0 Yes
Ian (NHCE) $1,140 $800 $0 Yes
Jim (NHCE) $0 $400 $200 Yes
401(a) Minimum Coverage:
Test is met since all NHCEs are benefiting under the 401(a)
portion of the plan
38
Plan Design #3 – Safe Harbor 401(k)
ParticipantsW-2
WagesQNEC
Top-Heavy
W-2 ExclOvertime
Profit Sharing
HCEs
Fred $250,000 $0 $0 $250,000 $7,500
Gail $150,000 $0 $0 $150,000 $4,500
NHCEs
Hope $50,000 $1,000 $0 $50,000 $1,500
Ian $40,000 $800 $0 $38,000 $1,140
Jim $20,000 $400 $200 $18,000 $0
401(a)(4) Non-discrimination
Test:
All nonelective contributions are combined & tested together•Profit sharing•QNECs•Safe harbor 401(k) non-electives
•ForfeituresNote: 414(s) compensation must be used for nondiscrimination testing
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Plan Design #3 – Safe Harbor 401(k)
414(s) Compensation
• Used for –
• Coverage testing
• Nondiscrimination testing
• Safe harbor 401(k) contributions
• Measurement period
• Generally the plan year
• Full year or while a participant
415 Compensation
• Used for –
• 415 limits (limitation year)
• Top-heavy minimums (plan year)
• Determining key employees
• Determining HCEs
• 404 deduction limit (fiscal year)
• Measurement period
• Different for each use
• Full year
May also be used for allocations
40
Plan Design #3 – Safe Harbor 401(k)
• 414(s) Compensation• Required for nondiscrimination testing – 401(k), 401(m) & 401(a)(4)
• Safe harbor definition deemed to satisfy §414(s), or
• Other compensation definition that is reasonable and satisfies compensation ratio test
• If pass test, definition may be used in nondiscrimination testing
• If fail test, perform testing with 414(s) safe harbor definition
• Nondiscrimination tests more difficult to satisfy
• If results in non-uniform allocation rates, can’t rely on 401(a)(4) safe harbor
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41
Plan Design #3 – Safe Harbor 401(k)
ParticipantsW-2 Excl Overtime
W-2 Wages
Ratio
Fred $250,000 $250,000 100%
Gail $150,000 $150,000 100%
HCE Avg 100%
Hope $50,000 $50,000 100%
Ian $38,000 $40,000 95%
Jim $18,000 $20,000 90%
NHCE Avg 95%
414(s) Compensation
Ratio Test:
The HCE % exceeds the NHCE % by more than a “de minimis” amount → must use
W-2 wages for testing
42
Plan Design #3 – Safe Harbor 401(k)
ParticipantsW-2
WagesProfit
SharingQNEC
Top-Heavy
Alloc Rate
HCEs
Fred $250,000 $7,500 $0 $0 3.00%
Gail $150,000 $4,500 $0 $0 3.00%
NHCEs
Hope $50,000 $1,500 $1,000 $0 5.00%
Ian $40,000 $1,140 $800 $0 4.85%
Jim $20,000 $0 $400 $200 3.00%
401(a)(4) Non-discrimination
Test:
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43
Plan Design #3 – Safe Harbor 401(k)
ParticipantsAllocation
Rate3% Rate Group
HCEs
Fred 3.00% X
Gail 3.00% X
NHCEs
Hope 5.00% X
Ian 4.85% X
Jim 3.00% X
401(a)(4) General Test:
Ratio Percentage Test:HCEs benefiting:
2/2 = 100%NHCEs benefiting:
3/3 = 100%Ratio percentage:
100%/100% = 100%
401(a)(4) is satisfied since each rate group passes coverage
44
Plan Design #4 – Safe Harbor 401(k) KLue Corporation 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility: Age 21 & 1 YOS (1,000 hours)• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: None• Safe harbor contribution: 3% nonelective to all eligible participants• Match: None• Discretionary nonelective: Pro rata (10%)• Nonelective conditions: Last day of plan year• Top-heavy minimum: Non-key employees employed on last day of year
Note: The plan is top-heavy
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45
Plan Design #4 – Safe Harbor 401(k)
ParticipantsEmployed
last dayW-2
WagesElective
Deferrals3% Safe Harbor
10% ProfitSharing
HCEs
Kate (40) Yes $150,000 $18,500 $4,500 $15,000
Liam (41) Yes $150,000 $12,000 $4,500 $15,000
NHCEs
Mary (50) Yes $60,000 $4,000 $1,800 $6,000
Neal (33) No $30,000 $0 $900 $0
Otis (44) Yes $15,000 $300 $450 $1,500
Note: NHCEs are non-key employees.
46
Plan Design #4 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals
Kate $150,000 $18,500
Liam $150,000 $12,000
Mary $60,000 $4,000
Neal $30,000 $0
Otis $15,000 $300
Elective Deferral
Limit:
No participant exceeds the 402(g) limit
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47
Plan Design #4 – Safe Harbor 401(k)
401(k) Plan
401(k) portion
ADP test deemed
satisfied (safe harbor)
Coverage: All nonexcludable
NHCEs benefiting
401(m) portion
N/A (no match)
ADP & ACP Tests &
Minimum Coverage
48
Plan Design #4 – Safe Harbor 401(k)
Top-Heavy Minimum:
Non-KeysW-2
Wages3% Safe Harbor
ProfitSharing
Mary $60,000 $1,800 $6,000
Otis $15,000 $450 $1,500
• Neal is not employed on the last day →
is not eligible for top-heavy minimum• Employer contributions to Mary and Otis
satisfy required minimum
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49
Plan Design #4 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals3% Safe Harbor
Profit Sharing
Annual Additions
Kate $150,000 $18,500 $4,500 $15,000 $38,000
Liam $150,000 $12,000 $4,500 $15,000 $31,500
Mary $60,000 $4,000 $1,800 $6,000 $11,800
Neal $30,000 $0 $900 $0 $900
Otis $15,000 $300 $450 $1,500 $2,250
415 Limit:
No participant exceeds their 415 limit
50
Plan Design #4 – Safe Harbor 401(k)
Participants3% Safe Harbor
Profit Sharing
Benefiting?
Kate (HCE) $4,500 $15,000 Yes
Liam (HCE) $4,500 $15,000 Yes
Mary (NHCE) $1,800 $6,000 Yes
Neal (NHCE)* $900 $0 Yes
Otis (NHCE) $450 $1,500 Yes
401(a) Minimum Coverage:
* Terminated with 1,800 hours (60% vested)
Test is met since all NHCEs are benefiting under the 401(a) portion of the plan
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51
Plan Design #4 – Safe Harbor 401(k)
Nonelective Contribution
Allocation Formula*
Allocation conditions
Safe harbor 401(k) 3% to all eligible None
Profit sharing Pro rata Last day
Satisfy 401(a)(4) safe harbor?
Yes No
401(a) Non-discrimination
Test:
* All allocations based on 414(s) compensation
Since the nonelective contributions are not available on the same terms, the 401(a)(4)
safe harbor rule not met → general test
+
52
Plan Design #4 – Safe Harbor 401(k)
ParticipantsW-2
Wages3% Safe Harbor
Profit Sharing
Allocation Rate
HCEs
Kate $150,000 $4,500 $15,000 13%
Liam $150,000 $4,500 $15,000 13%
NHCEs
Mary $60,000 $1,800 $6,000 13%
Neal $30,000 $900 $0 3%
Otis $15,000 $450 $1,500 13%
401(a) Non-discrimination
Test:
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53
Plan Design #4 – Safe Harbor 401(k)
ParticipantsAllocation
Rate
13%Rate
Group
HCEs
Kate 13% X
Liam 13% X
NHCEs
Mary 13% X
Neal 3%
Otis 13% X
401(a)(4) General Test:
Ratio Percentage Test:HCEs benefiting:
2/2 = 100%NHCEs benefiting:
2/3 = 66.67%Ratio percentage:
66.67%/100% = 66.67%
Fails ratio percentage test → apply average benefits test to rate group
54
Plan Design #4 – Safe Harbor 401(k)
ParticipantsTotal
AllocationAllocation
Rate
Kate $38,000 25.33%
Liam $31,500 21.00%
HCE Avg 23.17%
Mary $11,800 19.67%
Neal $900 3.00%
Otis $2,250 15.00%
NHCE Avg 12.56%
401(a)(4) General Test:
Modified nondiscriminatory classification test: Met since ratio percentage of 66.67% is ≥ midpoint of 45Average benefit percentage test: Fails since average benefit is not ≥ 70%(12.56%/23.17% = 54.21%)
Fails 401(a)(4) since neither ratio percentage test nor average benefits test pass
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55
Plan Design #4 – Safe Harbor 401(k)
• 401(a)(4) Test Failure• Retroactive plan amendment (Treas. Reg. §1.401(a)(4)-11(g)(3))
• Expand coverage or increase allocations
• Increase alone must satisfy §401(a)(4) and §410(b)
• May not reduce benefits
• Must be adopted within 9½ months of plan year end
• Must have substance for affected employee
• Options
• Amendment to allocate 10% profit sharing contribution to nonexcludable NHCEs not employed on the last day of plan year
• Amendment to allocate an additional 3.66% to nonexcludable NHCEs
56
Plan Design #4 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
DeferralsSafe
HarborProfit
Sharing11(g)
AllocationAnnual
Additions
Kate $150,000 $18,500 $4,500 $15,000 $0 $38,000
Liam $150,000 $12,000 $4,500 $15,000 $0 $31,500
Mary $60,000 $4,000 $1,800 $6,000 $2,196 $13,996
Neal $30,000 $0 $900 $0 $1,098 $1,998
Otis $15,000 $300 $450 $1,500 $549 $2,799
415 Limit:
No participant exceeds their 415 limit
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57
Plan Design #4 – Safe Harbor 401(k)
ParticipantsTotal
AllocationAvg
Benefit %
Kate $38,000 25.33%
Liam $31,500 21.00%
HCE Avg 23.17%
Mary $13,996 23.33%
Neal $1,998 6.66%
Otis $2,799 18.66%
NHCE Avg 16.22%
401(a)(4) General Test:
Modified nondiscriminatory classification test: Met since ratio percentage of 66.67% is ≥ midpoint of 45Average benefit percentage test: Met since average benefit is ≥ 70%(16.22%/23.17% = 70%)
401(a)(4) is satisfied since rate group passes coverage
58
Plan Design #5 – Safe Harbor 401(k) PR, Inc. 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility: Age 21 & 1 YOS (1,000 hours)• Compensation: W-2 wages from date of participation• Catch-up contributions: Permitted• Plan limit on deferrals: None• Safe harbor contribution: 3% nonelective to all eligible participants• Match: None• Discretionary nonelective: Each participant in own allocation group• Nonelective conditions: None• Top-heavy minimum: Non-key employees employed on last day of year
Note: The plan is top-heavy
4/13/2018
30
59
Plan Design #5 – Safe Harbor 401(k)
ParticipantsEmployed
last dayW-2
WagesW-2 Entry
DateElective Deferral
3% Safe Harbor
ProfitSharing
HCEs
Patti (54) Yes $250,000 $24,500 $7,500 $29,000
Ron (52) Yes $250,000 $24,500 $7,500 $29,000
NHCEs
Sue (35) Yes $75,000 $4,500 $2,250 $1,402
Tom (25) Yes $30,000 $15,000 $600 $450 $280
Vic (28) No $20,000 $400 $600 $0
Note: All NHCEs are non-key employees.
60
Plan Design #5 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals
HCEs
Patti (54) $250,000 $24,500
Ron (52) $250,000 $24,500
NHCEs
Sue $75,000 $4,500
Tom $30,000 $600
Vic $20,000 $400
Elective Deferral
Limit:
Deferral = $18,500Catch-up = $6,000
4/13/2018
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61
Plan Design #5 – Safe Harbor 401(k)
401(k) Plan
401(k) portion
ADP test deemed
satisfied (safe harbor)
Coverage: All nonexcludable
NHCEs benefiting
401(m) portion
N/A (no match)
ADP & ACP Tests &
Minimum Coverage
62
Plan Design #5 – Safe Harbor 401(k)
Top-Heavy Minimum:
Non-KeysW-2
Wages3% Safe Harbor
1.87% ProfitSharing
Top-Heavy
Sue $75,000 $2,250 $1,402 $0
Tom $30,000 $450 $280 $170
Additional contribution to satisfy top-heavy
minimum
• Vic is not employed on the last day → is not eligible for top-heavy minimum
• Employer contributions to Sue satisfy required minimum
4/13/2018
32
63
Plan Design #5 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals3% Safe Harbor
Profit Sharing
Top-Heavy
Annual Additions
Patti $250,000 $18,500 $7,500 $29,000 $0 $55,000
Ron $250,000 $18,500 $7,500 $29,000 $0 $55,000
Sue $75,000 $4,500 $2,250 $1,402 $0 $8,152
Tom $30,000 $600 $450 $280 $170 $1,500
Vic $20,000 $400 $600 $0 $0 $1,000
415 Limit:
No participant exceeds their 415 limit
64
Plan Design #5 – Safe Harbor 401(k)
Participants3% Safe Harbor
Profit Sharing
Top-Heavy
Benefiting?
Patti $7,500 $29,000 $0 Yes
Ron $7,500 $29,000 $0 Yes
Sue $2,250 $1,402 $0 Yes
Tom $450 $280 $170 Yes
Vic* $600 $0 $0 Yes
401(a) Minimum Coverage:
* Terminated with 1,100 hours (20% vested)
Test is met since all NHCEs are benefiting under the 401(a) portion of the plan
4/13/2018
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65
Plan Design #5 – Safe Harbor 401(k)
• Cross-Testing• Defined contribution plan satisfies general test on a benefits basis
• Contributions are projected to retirement and converted into equivalent benefits
• 401(a)(4) satisfied if each rate group passes coverage
• Gateway test
• Prerequisite to cross-testing
• NHCE minimum allocation = lesser of:
• 5% of 415 compensation, or
• 1/3 of highest % of 414(s) compensation allocated to any HCE
• Required for each NHCE who benefits under 401(a) portion of plan
66
Plan Design #5 – Safe Harbor 401(k)
ParticipantsW-2 Entry
Date3% Safe Harbor
Profit Sharing
Top-Heavy
Allocation Rate
HCEs
Patti $250,000 $7,500 $29,000 $0 14.6%
Ron $250,000 $7,500 $29,000 $0 14.6%
NHCEs
Sue $75,000 $2,250 $1,402 $0 4.87%
Tom $15,000 $450 $280 $170 6.0%
Vic $20,000 $600 $0 $0 3.0%
Gateway Test:
NHCE gateway allocation: 14.6% x 1/3 = 4.87%
Increase profit sharing to 1.87% = $374
4/13/2018
34
67
Plan Design #5 – Safe Harbor 401(k)
ParticipantsW-2
WagesElective
Deferrals3% Safe Harbor
Profit Sharing
Top-Heavy
Annual Additions
Patti $250,000 $18,500 $7,500 $29,000 $0 $55,000
Ron $250,000 $18,500 $7,500 $29,000 $0 $55,000
Sue $75,000 $4,500 $2,250 $1,402 $0 $8,152
Tom $30,000 $600 $450 $280 $170 $1,500
Vic $20,000 $400 $600 $374 $0 $1,374
415 Limit:
No participant exceeds their 415 limit with the additional gateway contribution
68
Plan Design #5 – Safe Harbor 401(k)
ParticipantsW-2 Entry
Date3% Safe Harbor
Profit Sharing
Top-Heavy
Allocation Rate
HCEs
Patti $250,000 $7,500 $29,000 $0 14.6%
Ron $250,000 $7,500 $29,000 $0 14.6%
NHCEs
Sue $75,000 $2,250 $1,402 $0 4.87%
Tom $15,000 $450 $280 $170 6.0%
Vic $20,000 $600 $374 $0 4.87%
Gateway Test:
NHCE gateway allocation: 14.6% x 1/3 = 4.87%
4/13/2018
35
69
Plan Design #5 – Safe Harbor 401(k)
Participants EBAR4.51% Rate
Group5.30% Rate
Group
HCEs
Patti (54) 4.51% X
Ron (52) 5.30% X X
NHCEs
Sue (35) 7.08% X X
Tom (25) 19.73% X X
Vic (28) 12.54% X X
Cross-Testing:
Ratio Percentage Test:
Patti’s Rate Group:(3/3) ÷ (2/2) = 100%
Ron’s Rate Group:(3/3) ÷ (1/2) = 200%
401(a)(4) is satisfiedsince each rate group passes coverage
70
Plan Design #6 – Traditional 401(k) Doc & Company 401(k) Plan• Plan year & limitation year: Calendar year 2018 – 1st plan year• Eligibility: Age 21 and 1 YOS (1,000 hours)• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: HCEs only – 10% of plan year compensation• ADP test: Prior year testing method (1st year = current year)• Match: Discretionary % up to 5% of compensation (100%)
• Match conditions: 501 hours or employed on last day• ACP test: Prior year testing method (1st year = current year)• Nonelective: Pro rata (0%)
• Nonelective conditions: None• Top-heavy minimum: Non-key employees employed on last day of year
4/13/2018
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71
Plan Design #6 – Traditional 401(k)
Participant Last Day? Hours W-2 Wages Deferrals Match Nonelective
HCEs/Keys
Doc (58) Yes 2,000 $200,000 $20,000 $10,000 $0
Mrs. (53) Yes 2,000 $100,000 $12,000 $5,000 $0
NHCEs
Abe Yes 900 $20,000 $800 $800 $0
Betty Yes 2,000 $70,000 $7,700 $3,500 $0
Connie No 400 $10,000 $189 $0 $0
Note: All participants entered the plan on 1/1/2018 and began deferring
72
Plan Design #6 – Traditional 401(k)
ParticipantsW-2
WagesElective
Deferrals
Doc (58) $200,000 $20,000
Mrs. (53) $100,000 $12,000
Abe $20,000 $800
Betty $70,000 $7,700
Connie $10,000 $189
Elective Deferral Limits:
Deferral = $18,500Catch-up = $1,500
Deferral = $10,000Catch-up = $2,000
402(g) limit
Plan limit
4/13/2018
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73
Plan Design #6 – Traditional 401(k)
• ADP & ACP Testing Methods
Current Year Data Prior Year Data
Current Year Method HCEs & NHCEs
Prior Year Method HCEs NHCEs
74
Plan Design #6 – Traditional 401(k)
Participant Last Day? Hours W-2 Wages Deferrals ADR
Doc (58) Yes 2,000 $200,000 $18,500 9.25%
Mrs. (53) Yes 2,000 $100,000 $10,000 10.00%
HCE ADP 9.63%
Abe Yes 900 $20,000 $800 4.00%
Betty Yes 2,000 $70,000 $7,700 11.00%
Connie No 400 $10,000 $189 1.89%
NHCE ADP* 5.63%
1.25 7.04%
Fail 2x or 2+ 7.63%
ADP Test:
*Because of 1st year election, used for ADP test for the 1st and 2nd plan years
4/13/2018
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75
Plan Design #6 – Traditional 401(k)
• Failed ADP Test• Excess contribution = $5,610 (fully attributed to Doc)
• Catch-up contribution =
• Corrective distribution to Doc = $1,110 plus allocable earnings
• No related matching contributions
Catch-up limit $6,000
402(g) excess ($1,500)
Remaining amount $4,500
76
Plan Design #6 – Traditional 401(k)
Participant Last Day? Hours W-2 Wages Match ACR
Doc Yes 2,000 $200,000 $10,000 5.00%
Mrs. Yes 2,000 $100,000 $5,000 5.00%
HCE ACP 5.00%
Abe Yes 900 $20,000 $800 4.00%
Betty Yes 2,000 $70,000 $3,500 5.00%
Connie No 400 $10,000 $0 0.00%
NHCE ACP* 4.50%
1.25 5.63%
Pass 2x or 2+ 6.50%
ACP Test:
*Because of 1st year election, used for ACP test for the 1st and 2nd plan years
4/13/2018
39
77
Plan Design #6 – Safe Harbor 401(k)
401(k) Plan
401(k) portion
All nonexcludable
NHCEs benefiting
401(m) portion
All nonexcludable
NHCEs benefiting
401(k) & 401(m)
Minimum Coverage:
78
Plan Design #6 – Traditional 401(k)
Top-Heavy Status
Key Employees = 62% of account
balances
Non-key Employees = 38% of account
balances
Used to determine top-heavy status for 1st and 2nd plan years
4/13/2018
40
79
Plan Design #6 – Safe Harbor 401(k)
Top-Heavy Minimum:
Non-KeysW-2
WagesMatch
Abe $20,000 $800
Betty $70,000 $3,500
• Connie is not employed on the last day → is not eligible for top-heavy minimum
• Employer contributions to Abe and Betty satisfy required minimum
80
Plan Design #6 – Traditional 401(k)
Participant W-2 Wages Deferrals MatchAnnual
Additions
Doc $200,000 $18,500 $10,000 $28,500
Mrs. $100,000 $10,000 $5,000 $15,000
Abe $20,000 $800 $800 $1,600
Betty $70,000 $7,700 $3,500 $11,200
Connie $10,000 $189 $0 $189
415 Limit:
No participant exceeds their 415 limit
4/13/2018
41
81
Plan Design #7 – Traditional 401(k) DEF Company 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility: Age 21 and 1 YOS (1,000 hours)• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: None• ADP test: Current year testing method• Match: Discretionary % up to 3% of compensation (100%)• Match conditions: None• ACP test: Current year testing method• Nonelective: Pro rata (4%)• Nonelective conditions: 1,000 hours and last day employment• Top-heavy minimum: Non-key employees employed on last day of year
82
Plan Design #7 – Traditional 401(k)
Participant Last Day? Hours W-2 Wages Deferrals MatchProfit
Sharing
HCE/Key
Dan (49) Yes 2,000 $275,000 $19,250 $8,250 $11,000
NHCEs
Eli Yes 2,000 $30,000 $1,800 $900 $1,200
Faye Yes 2,000 $40,000 $3,200 $1,200 $1,600
Glen No 600 $10,000 $200 $200 $0
Hal Yes 1,000 $20,000 $0 $0 $800
Note: NHCEs are non-key employees, and the plan is top-heavy
4/13/2018
42
83
Plan Design #7 – Traditional 401(k)
ParticipantsW-2
WagesElective
Deferrals
Dan (49) $275,000 $19,250
Eli $30,000 $1,800
Faye $40,000 $3,200
Glen $10,000 $200
Hal $20,000 $0
Elective Deferral Limits:
Deferral = $18,500Excess = $750
84
Plan Design #7 – Traditional 401(k)
Participant W-2 Wages Deferrals ADR
Dan (49) $275,000 $19,250 7.00%
HCE ADP 7.00%
Eli $30,000 $1,800 6.00%
Faye $40,000 $3,200 8.00%
Glen $10,000 $200 2.00%
Hal $20,000 $0 0.00%
NHCE ADP 4.00%
1.25 5.00%
Fail 2x or 2+ 6.00%
ADP Test:
4/13/2018
43
85
Plan Design #7 – Traditional 401(k)
• Failed ADP Test – Correction Options:• Distribution of excess contribution = $2,750 plus allocable earnings
(coordinate with distribution of $750 excess deferral), or
• 1% QNEC to NHCEs ($1,000)
Participant W-2 Wages Deferrals QNEC ADR
Eli $30,000 $1,800 $300 7.00%
Faye $40,000 $3,200 $400 9.00%
Glen $10,000 $200 $100 3.00%
Hal $20,000 $0 $200 1.00%
NHCE ADP 5.00%
Pass 2x or 2+ 7.00%
86
Plan Design #7 – Traditional 401(k)
Participant W-2 Wages Match ACR
Dan $275,000 $8,250 3.00%
HCE ACP 3.00%
Eli $30,000 $900 3.00%
Faye $40,000 $1,200 3.00%
Glen $10,000 $200 2.00%
Hal $20,000 $0 0.00%
NHCE ACP 2.00%
1.25 2.50%
Pass 2x or 2+ 4.00%
ACP Test:
4/13/2018
44
87
Plan Design #7 – Traditional 401(k)
401(k) Plan
401(k) portion
All nonexcludable
NHCEs benefiting
401(m) portion
All nonexcludable
NHCEs benefiting
401(k) & 401(m)
Minimum Coverage:
88
Plan Design #7 – Traditional 401(k)
Top-Heavy Minimum:
Non-KeysW-2
WagesQNEC Match
Profit Sharing
Eli $30,000 $300 $900 $1,200
Faye $40,000 $400 $1,200 $1,600
Hal $20,000 $200 $0 $800
• Glen is not employed on the last day →
is not eligible for top-heavy minimum• Employer contributions to Eli, Faye and
Hal satisfy required minimum
4/13/2018
45
89
Plan Design #7 – Traditional 401(k)
ParticipantW-2
WagesDeferrals Match QNEC
Profit Sharing
Annual Additions
Dan $275,000 $19,250 $8,250 $0 $11,000 $38,500
Eli $30,000 $1,800 $900 $300 $1,200 $4,200
Faye $40,000 $3,200 $1,200 $400 $1,600 $6,400
Glen $10,000 $200 $200 $100 $0 $500
Hal $20,000 $0 $0 $200 $800 $1,000
415 Limit:
No participant exceeds their 415 limit
90
Plan Design #7 – Traditional 401(k)
ParticipantLastDay?
HoursProfit
SharingQNEC Benefiting?
Dan (HCE) Yes 2,000 $11,000 $0 Yes
Eli (NHCE) Yes 2,000 $1,200 $300 Yes
Faye (NHCE) Yes 2,000 $1,600 $400 Yes
Glen (NHCE) No 600 $0 $100 Yes
Hal (NHCE) Yes 1,000 $800 $200 Yes
401(a) Minimum Coverage:
Test is met since all NHCEs are benefiting under the 401(a) portion of the plan
4/13/2018
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91
Plan Design #7 – Traditional 401(k)
Nonelective Contribution
Allocation Formula*
Allocation Conditions
QNEC 1% to all NHCEs None
Profit sharing Pro rata 1,000 hours & last day
Satisfy 401(a)(4) safe harbor?
Yes No
401(a)(4) Non-discrimination
Test:
* All allocations based on 414(s) compensation
+
Since the nonelective contributions are not available on the same terms, the 401(a)(4)
safe harbor rule not met → general test
92
Plan Design #7 – Traditional 401(k)
ParticipantsW-2
WagesQNEC
Profit Sharing
Allocation Rate
HCEs
Dan $275,000 $0 $11,000 4%
NHCEs
Eli $30,000 $300 $1,200 5%
Faye $40,000 $400 $1,600 5%
Glen $10,000 $100 $0 1%
Hal $20,000 $200 $800 5%
401(a)(4) General Test:
4/13/2018
47
93
Plan Design #7 – Traditional 401(k)
ParticipantsAllocation
Rate4% Rate Group
HCEs
Dan 4% X
NHCEs
Eli 5% X
Faye 5% X
Glen 1%
Hal 5% X
401(a)(4) General Test: Ratio Percentage Test:
HCEs benefiting: 1/1 = 100%
NHCEs benefiting:3/4 = 75%
Ratio percentage:75%/100% = 75%
401(a)(4) is satisfied since rate group passes coverage
94
Plan Design #8 – Traditional 401(k) JK, Inc. 401(k) Plan• Plan year & limitation year: Calendar year 2018• Eligibility: Age 21 and 1 YOS (1,000 hours)• Compensation: W-2 wages• Catch-up contributions: Permitted• Plan limit on deferrals: None• ADP test: Current year testing method• Match: Discretionary % up to 3% of compensation (0%)
• Match conditions: None• ACP test: Current year testing method• Nonelective: Each participant in own allocation group ($0)
• Nonelective conditions: NoneNote: The plan is not top-heavy
4/13/2018
48
95
Plan Design #8 – Traditional 401(k)
Participant Last Day? Hours W-2 Wages Deferrals MatchProfit
Sharing
HCE/Key
Jan (55) Yes 2,000 $275,000 $6,000 $0 $0
Kit (49) Yes 2,000 $175,000 $10,185 $0 $0
NHCEs
Lou (38) Yes 2,000 $100,000 $3,000 $0 $0
May (30) No 600 $10,000 $0 $0 $0
Ned (26) Yes 1,500 $30,000 $450 $0 $0
96
Plan Design #8 – Traditional 401(k)
ParticipantsW-2
WagesElective
Deferrals
Jan $275,000 $6,000
Kit $175,000 $10,185
Lou $100,000 $3,000
May $10,000 $0
Ned $30,000 $450
Elective Deferral Limits:
No participant exceeds the 402(g) limit
4/13/2018
49
97
Plan Design #8 – Traditional 401(k)
Participant W-2 Wages Deferrals ADR
Jan $275,000 $6,000 2.18%
Kit $175,000 $10,185 5.82%
HCE ADP 4.00%
Lou $100,000 $3,000 3.00%
May $10,000 $0 0.00%
Ned $30,000 $450 1.50%
NHCE ADP 1.50%
1.25 1.88%
Fail 2x or 2+ 3.00%
ADP Test:
98
Plan Design #8 – Traditional 401(k)
• Failed ADP Test• Excess contribution = $3,500 (attributed fully to Kit)
• No related matching contributions
• Correction options
• Corrective QNEC to increase NHCE ADP
• But Jan does not want to make an employer contribution to the plan
• Corrective distribution to Kit = $3,500 plus allocable earnings
4/13/2018
50
99
Plan Design #8 – Traditional 401(k)
401(k) Plan
401(k) portion
All nonexcludable
NHCEs benefiting
401(m) portion
N/A (no match)
401(k) & 401(m)
Minimum Coverage:
100
Plan Design #8 – Traditional 401(k)
ParticipantW-2
WagesDeferrals Match
Profit Sharing
Annual Additions
Jan $275,000 $6,000 $0 $0 $6,000
Kit $175,000 $10,185 $0 $0 $10,185
Lou $100,000 $3,000 $0 $0 $3,000
May $10,000 $0 $0 $0 $0
Ned $30,000 $450 $0 $0 $450
415 Limit:
No participant exceeds their 415 limit
4/13/2018
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101
Plan Design #8 – Traditional 401(k)
• But one month later…• JK, Inc. decides to make a nonelective profit sharing contribution
• Jan asks you to calculate the contribution based on these goals
• Maximize her allocation
• Minimize allocations to everyone else
• Do not allocate a contribution to terminated participants
102
Plan Design #8 – Traditional 401(k)
ParticipantW-2
WagesDeferrals Match
Profit Sharing
Annual Additions
Jan (55) $275,000 $6,000 $0 $55,000 $61,000
Kit $175,000 $10,185 $0 $26,250 $36,435
Lou $100,000 $3,000 $0 $5,000 $8,000
May $10,000 $0 $0 $0 $0
Ned $30,000 $450 $0 $1,500 $1,950
415 Limit:
• Jan’s 415 limit = $55,000 • Excess annual addition = $6,000 ($61,000 - $55,000)• Catch-up eligible → deferral is recharacterized as $6,000 catch-up contribution
4/13/2018
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103
Plan Design #8 – Traditional 401(k)
Participant W-2 Wages Deferrals ADR
Jan $275,000 $0 0.00%
Kit $175,000 $10,185 5.82%
HCE ADP 2.91%
Lou $100,000 $3,000 3.00%
May $10,000 $0 0.00%
Ned $30,000 $450 1.50%
NHCE ADP 1.50%
1.25 1.88%
Pass 2x or 2+ 3.00%
ADP Test:
104
Plan Design #8 – Traditional 401(k)
• Excess annual addition → catch-up contribution• Impact on previously performed ADP test
• $3,500 excess contributions plus allocable income was distributed
• No guidance!
• Possible approach
• Re-run ADP test
• If test now passes, treat excess corrective distribution as an overpayment under EPCRS
• Treat ADP test as unaffected
• At time test performed, nonelective contribution hadn’t been made
4/13/2018
53
105
Plan Design #8 – Traditional 401(k)
ParticipantLastDay?
Hours Benefiting?Avg Benefit
%
Jan (HCE) Yes 2,000 Yes 5.69%
Kit (HCE) Yes 2,000 Yes 8.50%
HCE Avg 7.10%
Lou (NHCE) Yes 2,000 Yes 9.11%
May (NHCE) No 600 No 0.00%
Ned (NHCE) Yes 1,000 Yes 19.70%
NHCE Avg 9.60%
401(a) Minimum Coverage: Ratio percentage
test fails, but average benefits
test passes →minimum coverage
satisfied
106
Plan Design #8 – Traditional 401(k)
ParticipantsW-2
WagesProfit
SharingAllocation
Rate
HCE
Jan $275,000 $55,000 20%
Kit $175,000 $26,250 15%
NHCEs
Lou $100,000 $5,000 5%
May $10,000 $0 0%
Ned $30,000 $1,500 5%
Gateway Test:
NHCE gateway allocation = 5% → gateway satisfied and can proceed to cross-testing
Did not receive a nonelective allocation → not subject to gateway test
4/13/2018
54
107
Plan Design #8 – Traditional 401(k)
EBAR5.69% Rate
Group
7.27% Rate
Group
HCE/Key
Jan (55) 5.69% X
Kit (49) 7.27% X X
NHCEs
Lou (38) 5.69% X
May (30) 0.00%
Ned (26) 15.15% X X
Cross-Testing:
Modified nondiscriminatory classification test: Met since ratio percentage of 66.67% is ≥ midpoint of 45Average benefit percentage test: Met since plan’s average benefit is ≥ 70%(9.60%/7.10% = 135.21%)
401(a)(4) is satisfied since each rate group passes covered
Questions?
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