Advanced Plan Design Peter Sullivan, VP Eastern Region - Sales

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Advanced Plan DesignPeter Sullivan, VP Eastern
Region - Sales
The Ritz-Carlton, San Francisco, California May
14-16, 2003
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Advanced Plan Design

• Safe Harbor NCP Plans
• Unique problemsCreative 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 Doesnt work.
• Can they design a Safe Harbor plan that would
  accomplish this goal?

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Safe Harbor 401(k) Plan

• Employee Comp Deferrals S/H Match
• A 200,000 11,000 8,000
• B 200,000 11,000 8,000
• C 38,800 1,200 1,182
• D 34,000 1,000 1,000
• E 28,000 0 0
• F 20,000 0 0
• NCP Doesnt work
• No PS Provision
• How do you get the HCEs 40,000?

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Safe Harbor 401(k) Plan

• Employee Comp Deferrals S/H Match Fixed Match
• A 200,000 11,000 8,000 13,000
• B 200,000 11,000 8,000 13,000
• C 38,800 1,200 1,182 1416
• D 34,000 1,000 1,000 1180
• E 28,000 0 0 0
• F 20,000 0 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 Comp Deferrals S/H Match F/ M
  D/M Total
• A 200,000 11,000 8,000 13,000 8,000 40,000
• B 200,000 11,000 8,000 13,000 8,000 40,000
• C 38,800 1,200 1,182 1416 873 4,671
• D 34,000 1,000 1,000 1180 727 3,907
• E 28,000 0 0 0 0 0
• F 20,000 0 0 0 0 0 Total 88
  ,578
• 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 500hrs of service
• What if they had a 1000hr requirement?
• Before any participant accrues 1000hrs 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 965,000 Total Profit
Sharing 36,000 Total 401(k) Deferral
54,950 Total 401(k) Match 0 Total
Safe Harbor 28,950
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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 ABCs Profit sharing plan be used to help
  with this problem?

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Signing Bonuses

• Hiring Problem Solution
• Identify a class of ees
• 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 HCEs 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 HCEs are eligible for the
  plan, can they do this?
• A. Yes, because there are no HCEs 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 ees (100 NHCs)
• Y Corp has 100 ees (85 NHCs)
• P corp has 20 ees (15 NHCs)
• Q. Z Y want to establish a plan, but they
  dont want cover P. Can they do this?

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410(b) Coverage Rules

• Yes, The plan must cover 70 of the NHC ees. 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 HCs and
  XYZ has 18 NHC 6 HCs.
• 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 NHCs
• ABC
• 3/933 70 23 276lt9Pass
• XYZ
• 6/966 70 46 2712lt18Pass
• 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

• Yes, document must specify
• The plan must pass 410(b) testing (70 ratio).
  If all of the companies make a contribution, this
  wont be an issue.
• 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 HCEs take advantage of DB
• Younger HCEs take advantage of DC

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Defined Benefit/Defined Contribution Plans

• May meet the needs of the HCEs, however, the
  NHCEs 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 DC DB
• HCE1 0 163,169
• HCE2 0 148,693
• HCE3 40,000
• HCE4 40,000
• NHCE1 9,960
• NHCE2 9,960
• NHCE3 2,299
• NHCE4 2,616
• Totals 99,920 316,776

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