Tip of the day
By Stephanie Reagan
There are a number of ways to pass discrimination testing for the profit-sharing component of a company's retirement plan when some or all of the Highly Compensated Employees (HCEs) are receiving higher profit-sharing allocations. One way is to restructure the plan into two or more "component plans".
The plan as a whole must satisfy the coverage requirements of 410(b) as well as the top-heavy requirements. When testing the components, each can be tested on a different basis - one can be tested on an allocation basis and one on a cross-tested benefits basis. If the cross-tested benefits basis is used, the minimum gateway contribution must be provided to all of the benefiting Non-Highly Compensated Employees (NHCEs) in the plan.
Creating the groupings
Try grouping the older HCEs and younger NHCEs together and group the younger HCEs and the older NHCEs together.
Since an owner's spouse or child would be considered a separate HCE for testing purposes, if either is working for the company, you could provide the lower NHCE profit-sharing contribution % to them in order for the HCE group (receiving a higher profit-sharing contribution) to pass coverage.
The discrimination testing rules are pretty complicated so all of the variables of a particular plan need to be taken into account to determine how best to formulate your testing procedures.
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