Retirement
Services University
Advanced Plan Design
Peter Sullivan, VP Eastern Region - Sales
The Ritz-Carlton, San Francisco, California
May 14-16, 2003
Advanced Plan Design
–Safe Harbor NCP Plans
–Unique problems=Creative Plan design
–Plan Design using Coverage Rules
–DB/DC Combo plans
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Safe Harbor
ABC company has a calendar year 401(k) plan.
They want to adopt a safe harbor plan on July 1.
Can they do this?
Would the answer change if they only had a PS
plan?
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Safe Harbor
ABC company has a calendar year 401(k) plan.
They want to adopt a safe harbor plan on July 1.
Can they do this?
• A. No, plan year must be 12 months & 30 day notice
must be given prior start of plan year.
Would the answer change if they only had a PS
plan?
• A. Yes
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Safe Harbor
ABC company Does Not have any plan. They want
to adopt a safe harbor plan on Oct.1
Can they do this?
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Safe Harbor
ABC company Does Not have any plan. They want
to adopt a safe harbor plan on Oct.1
Can they do this?
• A. Yes, 30 day notice must be given & first plan year
must be at least 3 months for new plan
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Safe Harbor
ABC Company wants to gets its Key Employees to
$40,000, however NCP Doesn’t work.
Can they design a Safe Harbor plan that would
accomplish this goal?
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Safe Harbor 401(k) Plan
Employee
•
•
•
•
•
•
•
•
Comp
A
$200,000
B
$200,000
C
$38,800
D
$34,000
E
$28,000
F
$20,000
NCP Doesn’t work
No PS Provision
Deferrals
S/H Match
$11,000
$11,000
$1,200
$1,000
$0
$0
$8,000
$8,000
$1,182
$1,000
$0
$0
How do you get the HCE’s $40,000?
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Safe Harbor 401(k) Plan
Employee
•
•
•
•
•
•
A
B
C
D
E
F
Comp
Deferrals
S/H Match Fixed Match
$200,000
$200,000
$38,800
$34,000
$28,000
$20,000
$11,000
$11,000
$1,200
$1,000
$0
$0
$8,000
$8,000
$1,182
$1,000
$0
$0
$13,000
$13,000
$1416
$1180
$0
$0
• Fixed Match = 118% of elective deferrals not to exceed 5.5% of
Comp.
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Safe Harbor 401(k) Plan
Employee
•
•
•
•
•
•
A
B
C
D
E
F
Comp
Deferrals S/H Match F/ M
D/M
Total
$200,000
$200,000
$38,800
$34,000
$28,000
$20,000
$11,000
$11,000
$1,200
$1,000
$0
$0
$8,000
$8,000
$873
$727
0
0
$40,000
$40,000
$4,671
$3,907
$0
$0
Total
$88,578
$8,000
$8,000
$1,182
$1,000
$0
$0
$13,000
$13,000
$1416
$1180
$0
$0
• Fixed Match = 118% of elective deferrals not to exceed 5.5% of
Comp
• Disc. Match = 4%
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NCP Plans
ABC Company has a standardized plan document
requiring 500 hrs for a PS allocation.
When do they need to amend for NCP?
What if they had a 1000hr requirement?
What if they had a last day requirement?
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NCP Plans
ABC Company has a standardized plan document
requiring 500 hrs for a PS allocation.
When do they need to amend for NCP?
• Before any participant accrues 500hr’s of service
What if they had a 1000hr requirement?
• Before any participant accrues 1000hr’s of service
What if they had a last day requirement?
• Before end of the year.
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Safe Harbor with NCP
“How Does it Work?”
Use 3% non-elective Safe Harbor
 No ADP testing
 No ACP if matching meets IRS criteria
 HCEs can get $40,000 under 401(k) and NCP combo
 Same 3% can be used for top-heavy and NCP tests
 401(k) helps pass NCP tests
 100% vesting and employee notice required on safe harbor
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Safe Harbor with NCP
NCP with Non-Elective Safe Harbor
For Plan Year Ending December 31, 2002
Total Covered Income:
Total 401(k) Deferral:
Total Safe Harbor:
NAME
HCE 1
HCE 2
HCE 3
HCE 4
NHCE 1
NHCE 2
NHCE 3
NHCE 4
NHCE 5
NHCE 6
NHCE 7
NHCE 8
NHCE 9
NHCE 10
DATE OF
AGE
HIRE
51
51
51
51
36
36
36
36
36
36
36
36
36
36
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
1/01/99
$965,000
$ 54,950
$ 28,950
INCOME
$ 150,000
$ 150,000
$ 150,000
$ 150,000
$ 60,000
$ 55,000
$ 50,000
$ 45,000
$ 40,000
$ 35,000
$ 30,000
$ 25,000
$ 20,000
$ 5,000
Total Profit Sharing:
Total 401(k) Match:
NEW
COMPARABILITY
PLAN
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,000
9,000
9,000
9,000
-
(6.00%)
(6.00%)
(6.00%)
(6.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
(0.00%)
3% SAFE
HARBOR
CONTRIBUTION
401(K) PLAN
EE
$ 11,000
$ 11,000
$ 11,000
$ 11,000
$ 1,800
$ 1,650
$ 1,500
$ 1,350
$ 1,200
$ 1,050
$
900
$
750
$
600
$
150
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EE%
7.33%
7.33%
7.33%
7.33%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
ER
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$36,000
$
0
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,500
4,500
4,500
4,500
1,800
1,650
1,500
1,350
1,200
1,050
900
750
600
150
TOTAL ER*
CONTRIBUTION
$
$
$
$
$
$
$
$
$
$
$
$
$
$
13,500
13,500
13,500
13,500
1,800
1,650
1,500
1,350
1,200
1,050
900
750
600
150
14
Unique Problems = Creative Solutions
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The Hiring Problem
ABC Salon is having trouble attracting Hair
Dressers because of Multiple employment
opportunities available to them.
ABC Salon is looking for an alternative
compensation package that would help attract
these employees.
Can ABC’s Profit sharing plan be used to help with
this problem?
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Signing Bonuses
Hiring Problem Solution
Identify a class of ee’s
Use NCP Class Testing
Vesting Schedule applies
HCEs must be excluded
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Unique Problems= Creative Solutions
ABC Company wants to establish a matching
contribution for several classes of employees &
a profit sharing contribution for another set of
employees.
Assuming that no HCE’s are eligible for the plan,
can they do this?
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Unique Problems= Creative Solutions
ABC Company wants to establish a matching
contribution for several classes of employees &
a profit sharing contribution for another set of
employees.
Assuming that no HCE’s are eligible for the plan,
can they do this?
• A. Yes, because there are no HCE’s eligible
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Plan Design Using Coverage Rules
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410(b) Coverage Rules
Z Company is a controlled group with two other
companies
Z Corp has 120 ee’s (100 NHC’s)
Y Corp has 100 ee’s (85 NHC’s)
P corp has 20 ee’s (15 NHC’s)
Q. Z & Y want to establish a plan, but they don’t want
cover P. Can they do this?
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410(b) Coverage Rules
A. Yes, The plan must cover 70% of the NHC ee’s.
As long as they do this between Z & Y - they will
pass. If not they will have to cover P.
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410(b) Coverage Rules
ABC Company & XYZ are a controlled Group.
They would like to maintain separate plans with
separate benefits.
ABC has 9 NHC & 3 HC’s and
XYZ has 18 NHC & 6 HC’s.
Q. Can this be done?
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410(b) coverage Rules
A. Yes, subject to 410(b) testing
Each plan must cover 70% of NHC’s
• ABC
– 3/9=33% * 70% = 23% * 27=6<9=Pass
• XYZ
– 6/9=66%* 70% = 46% * 27=12<18=Pass
• Plans must be tested annually
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410(b) Coverage Rules
ABC company is a controlled group that would
like to add a single profit-sharing plan, however
they would like to have the ability to have
different profit-sharing allocations for each
company.
Can they do this?
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410(b) Coverage Rules
A. Yes, document must specify
B. The plan must pass 410(b) testing (70% ratio).
If all of the companies make a contribution, this
won’t be an issue.
C. Must pass 401a(4) testing (Cross Testing)
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Defined Benefit/Defined Contribution
404(n) removes ee deferrals from ER contribution.
Definition for deductible limits
Max deductible contribution is greater of 25% or
minimum required DB contribution
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Defined Benefit/Defined Contribution
Bob (52) earns $200K & Mary (55) earns $40,000.
If they set-up a PS/K plan. They can contribute:
– $60,000 PS
– $20,000 EE deferrals
– $4,000 Catch up
– Total: $84,000
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Defined Benefit/Defined Contribution
Bob (52) earns $200K & Mary (55) earns $40,000.
If they set-up a DB/K plan. They can contribute:
– $124,828 DB Funding
– $24,000 EE deferrals
– $4,000 Catch up
– Total: $152,828
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Defined Benefit/Defined Contribution
Separate DB/DC plans for same employer:
• Older HCE’s take advantage of DB
• Younger HCE’s take advantage of DC
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Defined Benefit/Defined Contribution Plans
• May meet the needs of the HCE’s, however,
the NHCE’s may not be so thrilled with
participating in a DB plan
• 404(a) 7 deduction limits do not apply
because no single EE covered by both plans
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Defined Benefit/Defined Contribution Plans
Employee
•
•
•
•
•
•
•
•
HCE#1
HCE#2
HCE#3
HCE#4
NHCE#1
NHCE#2
NHCE#3
NHCE#4
DC
DB
$0
$0
$40,000
$40,000
$9,960
$9,960
$163,169
$148,693
$2,299
$2,616
Totals: $99,920
$316,776
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