Compliance Coordinationmedia01.commpartners.com/.../2018/Session02/session2_2.pdf4/13/2018 1 Compliance Coordination Kim Martin, APA, CPC, QPA NIPA, Education Director Bates & Company,

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Compliance Coordination

Kim Martin, APA, CPC, QPANIPA, Education Director

Bates & Company, Inc., Account Executive

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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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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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• 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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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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• 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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• 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


• Discretionary match is limited to 4% of compensation N/A

• No allocation conditions permitted

• Vesting is allowed

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• 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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• 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

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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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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:

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• 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


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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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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:


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• 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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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

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• 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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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.)

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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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• 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

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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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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:


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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


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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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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

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• ADP Test• Enhanced match = 100% of first 8% deferred

• ADP safe harbor met since

• At each level of deferral is ≥ match under basic formula


• Match rate doesn’t increase as deferral rate increases

• ADP test is deemed satisfied

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• 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

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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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• Failed ACP Test• Excess aggregate contribution = $8,000 (fully attributed to Fred)



• 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%

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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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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


minimum

The top-heavy exemption does notapply since the plan doesn’t

consist solely of elective deferrals and safe harbor contributions

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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:


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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

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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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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

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• 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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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

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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%


Test:

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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

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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


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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.

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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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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

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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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ParticipantsW-2

WagesElective


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:


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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


* 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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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

+

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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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Rate

13%Rate

Group

HCEs

Kate 13% X

Liam 13% X

NHCEs

Mary 13% X

Neal 3%

Otis 13% X


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

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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%


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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• 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

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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:


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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%


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

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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


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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.

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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:


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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

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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


minimum

• Vic is not employed on the last day → is not eligible for top-heavy minimum

• Employer contributions to Sue satisfy required minimum

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ParticipantsW-2

WagesElective


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:


64


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


* Terminated with 1,100 hours (20% vested)


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• 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


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

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67


ParticipantsW-2

WagesElective


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


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%

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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

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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


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:



402(g) limit

Plan limit

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• ADP & ACP Testing Methods

Current Year Data Prior Year Data

Current Year Method HCEs & NHCEs

Prior Year Method HCEs NHCEs

74


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

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• Failed ADP Test• Excess contribution = $5,610 (fully attributed to Doc)

• Catch-up contribution =

• Corrective distribution to Doc = $1,110 plus allocable earnings


Catch-up limit $6,000

402(g) excess ($1,500)

Remaining amount $4,500

76


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

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401(k) Plan

401(k) portion

All nonexcludable

NHCEs benefiting

401(m) portion

All nonexcludable

NHCEs benefiting

401(k) & 401(m)

Minimum Coverage:

78


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

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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


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:


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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


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

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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


Deferral = $18,500Excess = $750

84


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:

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• 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


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:

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401(k) Plan

401(k) portion

All nonexcludable

NHCEs benefiting

401(m) portion

All nonexcludable

NHCEs benefiting

401(k) & 401(m)

Minimum Coverage:

88


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

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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:


90


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



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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


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


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%


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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

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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


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


No participant exceeds the 402(g) limit

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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


• Failed ADP Test• Excess contribution = $3,500 (attributed fully to Kit)



• 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

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99


401(k) Plan

401(k) portion

All nonexcludable

NHCEs benefiting

401(m) portion

N/A (no match)

401(k) & 401(m)

Minimum Coverage:

100


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:


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• 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


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

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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


• 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

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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


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

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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?

Documents

Compliance Coordinationmedia01.commpartners.com/.../2018/Session02/session2_2.pdf4/13/2018 1 Compliance Coordination Kim Martin, APA, CPC, QPA NIPA, Education Director Bates & Company,