Advanced Nondiscrimination Testing - asppa.org Outlines/WS09...o EE’s allocation for plan year derived from ER contributions (other than match) and forfeitures, divided by 414(s)

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Advanced Nondiscrimination Testing

• Limits extent to which plans can be designed in favor of HCEs = must pass both coverage and nondiscrimination tests every plan year

• Coverage measures relative coverage of HCEs and NHCEs

• Nondiscrimination measures level of benefits provided to HCEs and NHCEs

o 401(a)(4) nondiscrimination test = ER contributions

o ADP test = elective deferrals

o ACP test = matching contributions / after-tax

Coverage and Nondiscrimination

Coverage Tests

Percentage test

At least 70% of NHCEs benefit

Ratio test

% of NHCEs------------- > 70% % of HCEs

Average benefits

test

• Minimum coverage tests will be used to determine if rate groups are nondiscriminatory under Code §401(a)(4)

• Three coverage tests = only need satisfy one test under Code §410(b)

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Average Benefits Test

Nondiscriminatory

classification

test

Average

benefit

percentage

test

• Two parts to average benefits test = must

satisfy both parts to pass test

• Different rules apply for coverage vs. nondiscrimination

o Reasonable classification test does not apply for nondiscrimination test = can categorize EEs by name

o Can use midpoint between safe and unsafe harbors

Average Benefits Test

Nondiscriminatory classification test

o Use same fraction as under ratio percentage test

o Ratio must be above midpoint between safe harbor and unsafe harbor percentage (see chart)

Based on NHCE concentration percentage (i.e., percentage of EEs who are NHCEs)

Average benefit percentage (ABP) test

o NHCE average benefit percentage------------------------------------- > 70% HCE average benefit percentage

o Include benefit percentages of all non-excludable EEs

o Must include benefits under all plans of ER

General Nondiscrimination

• Each HCE rate group must satisfy a minimum coverage test under Code §410(b)

o Rate group includes all equal or higher allocation or equivalent benefit rates

• Rate groups may be expressed as allocation rates or equivalent benefit rates

• If using average benefits test = special rules apply

o Reasonable classification test does not apply

o May use midpoint between safe harbor and unsafe harbor

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• Cross-testing is process of converting contributions to equivalent benefit rates (DC plan) or benefits to equivalent allocation rates (DB plans)

o May cross-test for purposes of coverage and/or nondiscrimination testing

o If cross-test for nondiscrimination testing = must satisfy minimum gateway requirements

• Gateway contribution not required if only cross-testing for minimum coverage test

• Gateway contribution must be provided to all benefiting NHCEs to use cross-testing for nondiscrimination test

Cross-Testing Overview

• Contributions are projected to testing age using interest rate between 7.5% - 8.5%

o Multiply contribution by 1.085^N where “N” equals the number of years to testing age

• Convert projected contribution to single life annuity

o Divide projected contribution by annuity factor

o For plan using 8.5% interest factor and UP 1984 mortality table = factor is 7.9486

• Equivalent benefit rate (EBR) = divide projected annuity by 414(s) compensation

Cross-Testing Overview

• Gateway test = to use “cross-testing” for discrimination testing, plan must satisfy one of “gateway” tests:

o All benefiting NHCEs must receive at least 5% allocation (based on §415(c) compensation) OR

o Lowest allocation to any NHCE must be at least 1/3 of highest allocation to any HCE (based on any definition of §414(s) compensation)

• Example. If highest HCE rate is 12%, lowest NHC rate must be 4%. If highest HCE rate is 18%, lowest NHC rate must be 5%.

Minimum Gateway Requirements

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• One-third gateway test

o EE’s allocation for plan year derived from ER contributions (other than match) and forfeitures, divided by 414(s) compensation

• 5% gateway test

o Gateway contribution determined on basis of Code 415 compensation

• May use partial-year compensation

• Must be grossed up for all pre-tax deferrals

o IRS wants to ensure maximum amount of compensation taken into account for 5% gateway

Minimum Gateway Requirements

EE Age Comp. Deferral Alloc. Alloc % EBR

Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

NHCE 7 27 $30,000 $0 $1,321 4.403% 12.30%

NHCE 8 24 $25,000 $0 $1,101 4.403% 15.70%

Total $1,485,000 $79,000 $135,378

New Comp/SH 401(k) Plan

Plan must be tested under general nondiscrimination test on the basis of EBRs

• NHCE concentration % = 8/13 = 61.54%

Rate Group Testing

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Nondiscriminatory Classification TestNHCE concent. SH % UH % Midpoint NHCE concent. SH % UH % Midpoint

0-60 50.00 40.00 45.00 80 35.00 25.00 30.00

61 49.25 39.25 44.25 81 34.25 24.25 29.25

62 48.50 38.50 43,50 82 33.50 23.50 28.50

63 47.75 37.75 42.75 83 32.75 22.75 27.75

64 47,00 37.00 42.00 84 32.00 22.00 27.00

65 46.25 36.25 41.25 85 31.25 21.25 26.25

66 45.50 35.50 40.50 86 30.50 20,00 25.50

67 44.75 34.75 39.75 87 29.75 20.00 24.875

68 44.00 34.00 39.00 88 29.00 20.00 24.50

69 43.25 33.25 38.25 89 28.25 20.00 24.125

70 42.50 32.50 37.50 90 27.50 20.00 23.75

71 41.75 31.75 36.75 91 26.75 20.00 23.375

72 41.00 31.00 36.00 92 26.00 20.00 23.00

73 40.25 30.25 35.25 93 25.25 20.00 22.625

74 39.50 29.50 34.50 94 24.50 20.00 22.25

75 38.75 28.75 33.75 95 23.75 20.00 21.875

76 38.00 28.00 33.00 96 23.00 20.00 21.50

77 37.25 27.25 32.25 97 22.25 20.00 21.125

78 36.50 26.50 31.50 98 21.50 20.00 20.750

79 35.75 25.75 30.75 99 20.75 20.00 20.375


• Midpoint % = 44.25%

o HCE 2 = 9.63% rate HCE 1 = 4.26% rateNHCE % = 2/8 = 25% NHCE % = 6/8 = 75%-------------------------- = 125% ------------------------- = 93.75%HCE % = 1/5 = 20% HCE % = 4/5 = 80%

o Dr. Akey = 9.22% rate Dr. Hurtz = 3.76% rateNHCE % = 2/8 = 25% NHCE % = 6/8 = 75%-------------------------- = 62.5% -------------------------- = 75%HCE % = 2/5 = 40% HCE % = 5/5 = 100%

o Dr. Payne = 5.65% rate NHCE % = 5/8 = 62.5%-------------------------- = 104.17%HCE % = 3/5 = 60%

Rate Group Testing

EE Age Comp. Deferral Alloc. Alloc % EBR Adj. EBR

Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76% 5.69%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65% 8.55%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22% 13.96%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26% 10.30%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63% 31.49%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25% 2.11%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01% 5.01%

NHCE 7 27 $30,000 $0 $1,321 4.403% 12.30% 12.30%

NHCE 8 24 $25,000 $0 $1,101 4.403% 15.70% 15.70%

Total $1,485,000 $79,000 $135,378


Must include all contributions under all plans for ABPT

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• Average benefit percentage test = average HCE benefits must not be more than 70% of average NHCE benefits

o Must include deferrals in average benefits

• Average benefit percentage test

o NHCE ratio = (2.11% + 1.88% + 6.40% + 6.40% + 8.18% + 5.01% + 12.30% + 15.70%) / 8 = 7.25%

o HCE ratio = (5.69% + 8.55% + 13.96% + 10.88% + 32.80%) / 5 = 14.00%

o Average benefit ratio = 7.25% / 14.00% = 51.77%

Rate Group Testing

• To correct violation of average benefits percentage test will need to make additional contribution for rank and file employees

• May wish to improve plan design to encourage rank and file employees to defer under plan

o Education / communication

o Hardships / loans

o QACA plan design

o Safe harbor match

Correction Options

• Increase contributions to NHCEs in order to satisfy ABPT

o Does plan need to be amended to increase benefits?

• Depends on plan design = e.g., separate groups

o If so, can plan be amended after end of plan year?

o Can amendment provide for increased benefits to specific employees by name?

o Could plan be amended to reduce contributions to HCEs?

• If haven’t made contributions = could reduce contributions to satisfy coverage test

Correction Options

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§1.401(a)(4)-11(g) Amendment

• Can amend plan within 9½ months after end of Plan Year to correct violation

– Amendment may not reduce benefits under Plan

• Increase in benefits must satisfy 401(a)(4) independently

– Always satisfied if increase is for NHCEs only

• Amendment must have substance – cannot apply increase to terminated nonvested EEs

• Can amend plan to provide additional contribution necessary to pass discrimination


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76% 5.69%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65% 8.55%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22% 13.96%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26% 10.30%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63% 31.49%

NHCE 1 55 $100,000 $3,000 $6,000 6.00% 1.71% 2.56%

NHCE 2 50 $85,000 $0 $5,100 6.00% 2.57% 2.57%

NHCE 3 35 $47,000 $0 $2,820 6.00% 8.72% 8.72%

NHCE 4 35 $42,000 $0 $2,520 6.00% 8.72% 8.72%

NHCE 5 32 $42,000 $0 $2,520 6.00% 11.14% 11.14%

NHCE 6 38 $39,000 $0 $2,340 6.00% 6.83% 6.83%

NHCE 7 27 $30,000 $0 $1,800 6.00% 16.76% 16.76%

NHCE 8 24 $25,000 $0 $1,500 6.00% 21.40% 21.40%

Total $1,485,000 $79,000 $141,927


Could plan provide additional contribution to all NHCEs in sufficient amount to satisfy ABPT?




o NHCE ratio = (2.56% + 2.57% + 8.72% + 8.72% + 11.14% + 6.83% + 16.76% + 21.40%) / 8 = 9.84%

o HCE ratio = (5.69% + 8.55% + 13.96% + 10.30% + 31.49%) / 5 = 14.00%


Rate Group Testing

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Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76% 5.69%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65% 8.55%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22% 13.96%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26% 10.30%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63% 31.49%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25% 2.11%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01% 5.01%

NHCE 7 27 $30,000 $0 $1,321 4.403% 12.30% 12.30%

NHCE 8 24 $25,000 $0 $2,533 10.13% 36.14% 36.14%

Total $1,485,000 $79,000 $136,810


Could plan provide additional benefits only to NHCE8 sufficient to satisfy ABPT?




o NHCE ratio = (2.11% + 1.88% + 6.40% + 6.40% + 8.18% + 5.01% + 12.30% + 36.14%) / 8 = 9.80%

o HCE ratio = (5.69% + 8.55% + 13.96% + 10.30% + 31.49%) / 5 = 14.00%


Rate Group Testing


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76% 5.69%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65% 8.55%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22% 13.96%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26% 10.30%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63% 31.49%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25% 2.11%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01% 5.01%

NHCE 7 27 $30,000 $0 $1,321 4.403% 12.30% 12.30%

NHCE 8 24 $25,000 $1,500 $1,101 4.403% 15.70% 37.11%

Total $1,485,000 $80,500 $135,378


Can also correct problem by having HCEs stop deferring (or having NHCEs increase deferrals) under plan = would only apply for future years

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o NHCE ratio = (2.11% + 1.88% + 6.40% + 6.40% + 8.18% + 5.01% + 12.30% + 37.11%) / 8 = 9.92%

o HCE ratio = (5.69% + 8.55% + 13.96% + 10.30% + 31.49%) / 5 = 14.00%


Rate Group Testing

Any Other Options?


• Midpoint % = 44.25%


o Dr. Akey = 9.22% rate Dr. Hurtz = 3.76% rateNHCE % = 2/8 = 25% NHCE % = 6/8 = 75%-------------------------- = 62.5% -------------------------- = 75%HCE % = 2/5 = 40% HCE % = 5/5 = 100%


Rate Group Testing

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Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76% 5.69%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65% 8.55%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22% 13.96%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26% 10.30%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63% 31.49%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25% 2.11%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40% 6.40%

NHCE 5 32 $42,000 $0 $2,087 4.97% 9.23% 9.23%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01% 5.01%

NHCE 7 27 $30,000 $0 $1,321 4.403% 12.30% 12.30%

NHCE 8 24 $25,000 $0 $1,101 4.403% 15.70% 15.70%

Total $1,485,000 $79,000 $135,617


Could provide additional contribution to NHCE5 in order to bring NHCE5 into Dr. Akey’s rate group


• Midpoint % = 44.25%


o Dr. Akey = 9.22% rate Dr. Hurtz = 3.76% rateNHCE % = 3/8 = 37.5% NHCE % = 6/8 = 75%-------------------------- = 93.75% -------------------------- = 75%HCE % = 2/5 = 40% HCE % = 5/5 = 100%


Rate Group Testing

EE Age Comp. DeferTotal ERContrib Alloc. % EBR

Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656

New Comp / SH 401(k) Plan

Suppose NHCE 7 and 8 terminate employment

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• Using different definitions of compensation = can use any definition that satisfies Code §414(s)

o Participation compensation

o Net compensation

o Average compensation

• Top-paid group test

• Imputing permitted disparity

• Accrued to date method

• Plan restructuring

Testing Alternatives

• EE must have compensation > dollar amount in lookback year and must be in top-paid group

o Top 20% of EEs ranked by compensation

o Election must be made in plan

• Allows plan to treat HCEs over 20% threshold as NHCEs

o Be careful when defining allocation groups to ensure HCEs do not lose benefits

o Once become NHCE = must receive gateway

• When must top paid group election be made?

o End of year/beginning of year/9½ months

Top Paid Group Test


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656


20% x 11 = 2.2. Therefore, can treat 2 HCEs as NHCEs

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• Takes into account the fact that HCEs do not receive SS on all compensation

• By imputing permitted disparity – NHCEs EBRs are increased at greater rate than HCE EBRs

• Do not have to be using permitted disparity – can use in rate group test

• Cannot use imputed permitted disparity with deferrals, matching contributions or SH contributions

Imputing Permitted Disparity

• Do not have to use only current year comp

• Regulations permit rate groups to be determined on basis of average comp

o Can use average compensation over period of at least 3 years

o Does not have to be defined in plan document

• Using average comp compared to current comp may improve test results

o NHCEs often have higher increases (as percentage of comp) than HCEs = results in lower average

Average Compensation


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656


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• HCE 2’s compensation history

o 2015 – $120,000

o 2014 – $110,000

o 2013 – $105,000

o 2012 – $100,000

o 2011 – $100,000

• Average compensation = $107,000

• New EBR for HCE 2 = 10.80% (instead of 9.63%)

Example

• NHCE 5’s compensation history

o 2015 – $42,000

o 2014 – $36,000

o 2013 – $30,000

o 2012 – $28,000 (Year of hire)


• New EBR for NHCE 5 = $10.10% (instead of 8.18%)

Example

• Can have significant impact if have NHCE hired during measurement period with low compensation

• NHCE 5’s compensation history

o 2015 – $42,000

o 2014 – $36,000

o 2013 – $30,000

o 2012 – $12,000 (Year of hire)


• New EBR for NHCE 5 = $11.45% (instead of 8.18%)

Example

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• Instead of using current contribution, can determine rate groups based on increase in A/B during measurement period

o Only take into account years in which EE benefits under plan

o Increase in A/B is divided by number of years in measurement period

o Need to have proper data (including years in which EE participated)

o Gains or losses attributable to contributions and forfeitures allocated during the measuring period are taken into account

Accrued to Date Method

Restructuring

• Plans may be “restructured” into component plans for purposes of coverage and nondiscrimination testing

• Can be useful in certain circumstances to allow plan to pass without having to provide additional benefits

o Can be very helpful where have young HCE or family member of owner

• Restructuring may not be used to avoid gateway = must provide gateway to all NHCEs

Restructuring

• Each component plan must separately satisfy coverage

• If component plan satisfies coverage = can be tested separately for nondiscrimination

• Plan can be restructured differently each year in any manner

o Each participant must be in one component plan

o No plan amendment is required = restructuring occurs only for testing purposes

o Probably will need to satisfy 70% coverage test unless have “reasonable classification”

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Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656

Restructuring

Plan can be restructured into component plans = Plan #1 includes HCE2 and NHCE1 and NHCE2.

Restructuring

• Divide plan into 2 plans and test separately for coverage and nondiscrimination

• Can use different nondiscrimination testing methods for each plan

• Plan #1 = young HCE and 2 older NHCEs

o HCEs = 1/5 = 20%; NHCEs = 2/6 = 33.33%

o 33.33%/20% = 166.65% = Passes ratio coverage test

o Since all EEs receive 5% allocation = passes uniform nondiscrimination test


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656

Restructuring

Plan can be restructured into component plans = Plan #2 includes Drs., HCE1 and remaining NHCEs

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Restructuring

• Divide plan into 2 plans and test separately for coverage and nondiscrimination

• Plan #2 = 3 doctors, HCE 1 and 4 younger NHCEs

o HCEs = 4/5 = 80%; NHCEs = 4/6 = 66.67%

o 66.67%/80% = 83.34% = passes ratio coverage test

o Plan is cross-tested = will need to increase benefit for NHCE5 to pass reasonable classification test

o Still may have to deal with ABP test


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $1,849 4.403% 8.18%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656

Restructuring

Plan can be restructured into component plans = Plan #2 includes Drs., HCE1 and remaining NHCEs


Dr. Hurtz 55 $265,000 $18,000 $35,000 13.21% 3.76%

Dr. Payne 50 $265,000 $18,000 $35,000 13.21% 5.65%

Dr. Akey 44 $265,000 $18,000 $35,000 13.21% 9.22%

HCE 1 40 $160,000 $10,000 $7,044 4.403% 4.26%

HCE 2 30 $120,000 $12,000 $5,283 4.403% 9.63%

NHCE 1 55 $100,000 $3,000 $4,403 4.403% 1.25%

NHCE 2 50 $85,000 $0 $3,742 4.403% 1.88%

NHCE 3 35 $47,000 $0 $2,069 4.403% 6.40%

NHCE 4 35 $42,000 $0 $1,849 4.403% 6.40%

NHCE 5 32 $42,000 $0 $2,085 4.96% 9.22%

NHCE 6 38 $39,000 $0 $1,717 4.403% 5.01%

$1,430,000 $79,000 $134,656

Restructuring

Plan can be restructured into component plans = Plan #2 includes Drs., HCE1 and remaining NHCEs.

1/19/2016

17


• Midpoint % = 45%

o Dr. Akey = 9.22% rate Dr. Payne = 5.65% rateNHCE % = 1/6 = 16.67% NHCE % = 3/6 = 50%--------------------------- = 83.33% ------------------------- = 125%HCE % = 1/5 = 20% HCE % = 2/5 = 40%

o HCE1 = 4.84% rate Dr. Hurtz = 3.76% rate

NHCE % = 4/6 = 66.67% NHCE % = 4/6 = 66.67%-------------------------- = 111.11% -------------------------- = 83.33%

HCE % = 3/5 = 60% HCE % = 4/5 = 80%

Restructuring

• No need to perform ABP test since all rate groups satisfy ratio test

• Include all nonexcludible EEs in rate groups

o Include EEs in Plan #1 as not benefiting in any rate group

• Place each EE in own group

o Gives ER flexibility to provide different contributions for different EEs

o Be careful if using separate groups for partnership

• Not aware of IRS challenging such a plan design

• Eliminate any minimum age requirement = want younger NHCEs in plan

• If 401(k) SH plan = do not include HCEs in SH contribution

o Gives flexibility not to give SH contribution to HCEs = e.g., where have young HCE

Plan Design Options

• Eliminate any last day/1000 HOS requirement = especially if using separate groups

o May want to give younger terminated EEs an additional contribution

o If have last day / 1,000 HOS requirement = plan should provide for additional gateway contribution

• May want to use “top-paid” group definition of HCEs

Plan Design Options

Documents

Advanced Nondiscrimination Testing - asppa.org Outlines/WS09...o EE’s allocation for plan year derived from ER contributions (other than match) and forfeitures, divided by 414(s)