Compliance Coordination

Transcription

1 Compliance Coordination Kim Martin, APA, CPC, QPA NIPA, Education Director Bates & Company, Inc., Account Executive 1

2 Compliance Tests Elective Deferral Limits ADP & ACP Tests 414(s) Compensation Test Top-Heavy Minimum 415 Limit Minimum Coverage Test 401(a)(4) Test 2 2

3 Interplay of Design & Testing Top heavy 410(b) 401(a)(4) 1,000 hours & last day 3 3

4 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 4 4

5 Plan Design #1 Safe Harbor 401(k) Participants HCEs NHCEs W-2 Wages Elective Deferrals Basic Match Profit Sharing Total Allocations Amy $300,000* $18,500 $11,000 $0 $29,500 Bert $25,000 $24,500 $1,000 $0 $25,500 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,

6 Plan Design #1 Safe Harbor 401(k) 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,

7 Plan Design #1 Safe Harbor 401(k) Elective Deferral Limit: Participants HCEs W-2 Wages Elective Deferrals 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 Deferral = $18,500 Catch-up = $6,

8 Plan Design #1 Safe Harbor 401(k) 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 8 8

9 Plan Design #1 Safe Harbor 401(k) 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 Level of match isn t higher for HCEs than NHCEs at same deferral rate Discretionary match is limited to 4% of compensation N/A No allocation conditions permitted Vesting is allowed 9 9

10 Plan Design #1 Safe Harbor 401(k) 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 Non-Keys top-heavy minimum for Dee and Ed is not required W-2 Wages Basic Match % of Comp Carol $75,000 $3,000 4% Dee $40,000 $800 2% Ed $25,000 $0 0% 10 10

11 Plan Design #1 Safe Harbor 401(k) 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: Do not include: Elective Deferrals Designated Roth contributions Employer contributions Forfeitures Catch-up contributions Investment earnings Loan repayments Rollovers/transfers 11 11

12 Plan Design #1 Safe Harbor 401(k) 415 Limit: Participants W-2 Wages Elective Deferrals Basic Match Annual Additions 415 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 No participant exceeds their 415 limit 12 12

13 Plan Design #1 Safe Harbor 401(k) Mandatory Disaggregation under Minimum Coverage Test: 401(k) portion 401(k) Plan 401(m) portion 401(a) portion All nonexcludable NHCEs benefiting All nonexcludable NHCEs benefiting No HCEs benefiting 13 13

14 Plan Design #1 Safe Harbor 401(k) 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 14 14

15 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 Note: The plan is top-heavy 15 15

16 Plan Design #2 Safe Harbor 401(k) Participants HCEs NHCEs YOS? W-2 Wages Elective Deferrals Basic Match Profit Sharing Total Allocations Amy Yes $300,000 $18,500 $11,000 $0 $29,500 Bert No $25,000 $24,500 $1,000 $0 $25,500 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

17 Plan Design #2 Safe Harbor 401(k) Elective Deferral Limit: Participants HCEs W-2 Wages Elective Deferrals 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 Deferral = $18,500 Catch-up = $6,

18 Plan Design #2 Safe Harbor 401(k) 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 18 18

19 Plan Design #2 Safe Harbor 401(k) ADP & ACP Tests: Participants YOS? Elective Deferral ADP Test ACP Test Plan 1 Exempt from ADP/ACP tests: Deemed satisfied Amy (HCE) Yes $18, % 4.00% Carol (NHCE) Yes $4, % 4.00% Dee (NHCE) Yes $ % 2.00% Plan 2 Subject to ADP/ACP tests: Fail Bert (HCE) No $18, % 0% Ed (NHCE) No $0 0% 0% 19 19

20 Plan Design #2 Safe Harbor 401(k) Failed ADP Test Excess contribution = $18,500 (fully attributed to Bert) Catch-up contribution = Catch-up limit $6, (g) excess ($6,000) Remaining amount $ 0 Correction options Corrective distribution to Bert = $18,500 plus allocable earnings Corrective QNEC to increase NHCE ADP No related matching contributions 20 20

21 Plan Design #2 Safe Harbor 401(k) 401(k) Portion Statutory Employees Safe Harbor Plan Otherwise Excludable Employees Plan Coverage Test Coverage Test ADP Test (Applies similarly to 401(m) portion and ACP test.) 21 21

22 Plan Design #2 Safe Harbor 401(k) 401(k) & 401(m) Minimum Coverage Tests: 401(k) Portion 401(m) Portion Statutory Employees Otherwise Excludable Employees Statutory Employees Otherwise Excludable Employees All nonexcludable NHCEs benefiting All nonexcludable NHCEs benefiting All nonexcludable NHCEs benefiting No HCEs benefiting 22 22

23 Plan Design #2 Safe Harbor 401(k) 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 If otherwise excludable employees are not covered by safe harbor whole plan subject to top-heavy rules 23 23

24 Plan Design #2 Safe Harbor 401(k) Top-Heavy Minimum: Non-Keys YOS? W-2 Wages Basic Match Top- 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 24 24

25 Plan Design #2 Safe Harbor 401(k) 415 Limit: Participants W-2 Wages Elective Deferrals Basic Match Top-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 No participant exceeds their 415 limit 25 25

26 Plan Design #2 Safe Harbor 401(k) 401(a) Minimum Coverage & Nondiscrimination Tests: Participants W-2 Wages Top- 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 26 26

27 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 Note: The plan is top-heavy 27 27

28 Plan Design #3 Safe Harbor 401(k) Participants HCEs NHCEs 1,000 Hours W-2 Wages Overtime Elective Deferrals SH Match 3% Profit Sharing Fred Yes $250,000 $0 $24,500 $20,000 $7,500 Gail Yes $150,000 $0 $24,500 $12,000 $4,500 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

29 Plan Design #3 Safe Harbor 401(k) Elective Deferral Participants W-2 Wages Elective Deferrals Limit: Fred (55) $250,000 $24,500 Deferral = $18,500 Gail (51) $150,000 $24,500 Catch-up = $6,000 Hope $50,000 $4,000 Ian $40,000 $1,600 Jim $20,000 $

30 Plan Design #3 Safe Harbor 401(k) ADP Test Enhanced match = 100% of first 8% deferred ADP safe harbor met since At each level of deferral is match under basic formula Level of match isn t higher for HCEs than NHCEs at same deferral rate Match rate doesn t increase as deferral rate increases ADP test is deemed satisfied 30 30

31 Plan Design #3 Safe Harbor 401(k) 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 31 31

32 Plan Design #3 Safe Harbor 401(k) ACP Test: Participants W-2 Wages SH Match ACR Fred $250,000 $20, % Gail $150,000 $12, % HCE ACP 8.00% Hope $50,000 $4, % Iris $40,000 $1, % Jim $20,000 $0 0.00% NHCE ACP 4.00% % Fail 2x or % 32 32

33 Plan Design #3 Safe Harbor 401(k) Failed ACP Test Excess aggregate contribution = $8,000 (fully attributed to Fred) No related matching contributions Correction options 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% 33 33

34 Plan Design #3 Safe Harbor 401(k) 401(k) & 401(m) Minimum Coverage Test: 401(k) Plan 401(k) portion 401(m) portion All nonexcludable NHCEs benefiting All nonexcludable NHCEs benefiting 34 34

35 Plan Design #3 Safe Harbor 401(k) Top-Heavy Minimum: Non-Keys W-2 Wages Enhanced Match Profit Sharing QNEC 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 The top-heavy exemption does not apply since the plan doesn t consist solely of elective deferrals and safe harbor contributions Additional contribution to satisfy top-heavy minimum 35 35

36 Plan Design #3 Safe Harbor 401(k) 415 Limit: Participant W-2 Wages Elective Deferrals SH Match Profit Sharing QNEC 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 No participant exceeds their 415 limit 36 36

37 Plan Design #3 Safe Harbor 401(k) 401(a) Minimum Coverage: Participants Profit Sharing QNEC 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 Test is met since all NHCEs are benefiting under the 401(a) portion of the plan 37 37

38 Plan Design #3 Safe Harbor 401(k) 401(a)(4) Nondiscrimination Test: All nonelective contributions are combined & tested together Profit sharing QNECs Safe harbor 401(k) nonelectives Forfeitures Participants HCEs NHCEs W-2 Wages QNEC Top- Heavy W-2 Excl Overtime Profit Sharing Fred $250,000 $0 $0 $250,000 $7,500 Gail $150,000 $0 $0 $150,000 $4,500 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 Note: 414(s) compensation must be used for nondiscrimination testing 38 38

39 Plan Design #3 Safe Harbor 401(k) 414(s) Compensation 415 Compensation Used for Coverage testing Nondiscrimination testing Safe harbor 401(k) contributions Measurement period Generally the plan year Full year or while a participant May also be used for allocations 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 39 39

40 Plan Design #3 Safe Harbor 401(k) 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 40 40

41 Plan Design #3 Safe Harbor 401(k) 414(s) Compensation Ratio Test: The HCE % exceeds the NHCE % by more than a de minimis amount must use W-2 wages for testing Participants W-2 Excl Overtime W-2 Wages Ratio Fred $250,000 $250, % Gail $150,000 $150, % HCE Avg 100% Hope $50,000 $50, % Ian $38,000 $40,000 95% Jim $18,000 $20,000 90% NHCE Avg 95% 41 41

42 Plan Design #3 Safe Harbor 401(k) 401(a)(4) Nondiscrimination Test: Participants HCEs NHCEs W-2 Wages Profit Sharing QNEC Top- Heavy Alloc Rate Fred $250,000 $7,500 $0 $0 3.00% Gail $150,000 $4,500 $0 $0 3.00% Hope $50,000 $1,500 $1,000 $0 5.00% Ian $40,000 $1,140 $800 $0 4.85% Jim $20,000 $0 $400 $ % 42 42

43 Plan Design #3 Safe Harbor 401(k) 401(a)(4) General Test: Participants HCEs NHCEs Allocation Rate 3% Rate Group Fred 3.00% X Gail 3.00% X Hope 5.00% X Ian 4.85% X Jim 3.00% X 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 43 43

44 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 Note: The plan is top-heavy 44 44

45 Plan Design #4 Safe Harbor 401(k) Participants HCEs Employed last day W-2 Wages Elective Deferrals 3% Safe Harbor 10% Profit Sharing 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

46 Plan Design #4 Safe Harbor 401(k) Elective Deferral Limit: Participants W-2 Wages Elective Deferrals Kate $150,000 $18,500 Liam $150,000 $12,000 Mary $60,000 $4,000 Neal $30,000 $0 Otis $15,000 $300 No participant exceeds the 402(g) limit 46 46

47 Plan Design #4 Safe Harbor 401(k) ADP & ACP Tests & Minimum Coverage 401(k) Plan 401(k) portion 401(m) portion ADP test deemed satisfied (safe harbor) Coverage: All nonexcludable NHCEs benefiting N/A (no match) 47 47

48 Plan Design #4 Safe Harbor 401(k) Top-Heavy Minimum: Non-Keys W-2 Wages 3% Safe Harbor Profit Sharing 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 48 48

49 Plan Design #4 Safe Harbor 401(k) 415 Limit: Participants W-2 Wages Elective Deferrals 3% Safe Harbor 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 No participant exceeds their 415 limit 49 49

50 Plan Design #4 Safe Harbor 401(k) 401(a) Minimum Coverage: Participants 3% 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 50 50

51 Plan Design #4 Safe Harbor 401(k) 401(a) Nondiscrimination Test: 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 * All allocations based on 414(s) compensation No Since the nonelective contributions are not available on the same terms, the 401(a)(4) safe harbor rule not met general test 51 51

52 Plan Design #4 Safe Harbor 401(k) 401(a) Nondiscrimination Test: Participants HCEs NHCEs W-2 Wages 3% Safe Harbor Profit Sharing Allocation Rate Kate $150,000 $4,500 $15,000 13% Liam $150,000 $4,500 $15,000 13% Mary $60,000 $1,800 $6,000 13% Neal $30,000 $900 $0 3% Otis $15,000 $450 $1,500 13% 52 52

53 Plan Design #4 Safe Harbor 401(k) 401(a)(4) General Test: Participants HCEs NHCEs Allocation Rate 13% Rate Group Kate 13% X Liam 13% X 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 53 53

54 Plan Design #4 Safe Harbor 401(k) 401(a)(4) General Test: Participants Total Allocation Allocation Rate Kate $38, % Liam $31, % HCE Avg 23.17% Mary $11, % Neal $ % Otis $2, % NHCE Avg 12.56% Modified nondiscriminatory classification test: Met since ratio percentage of 66.67% is midpoint of 45 Average 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 54 54

55 Plan Design #4 Safe Harbor 401(k) 401(a)(4) Test Failure Retroactive plan amendment (Treas. Reg (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 55 55

56 Plan Design #4 Safe Harbor 401(k) 415 Limit: Participants W-2 Wages Elective Deferrals Safe Harbor Profit Sharing 11(g) Allocation Annual 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 No participant exceeds their 415 limit 56 56

57 Plan Design #4 Safe Harbor 401(k) 401(a)(4) General Test: Participants Total Allocation Avg Benefit % Kate $38, % Liam $31, % HCE Avg 23.17% Mary $13, % Neal $1, % Otis $2, % NHCE Avg 16.22% Modified nondiscriminatory classification test: Met since ratio percentage of 66.67% is midpoint of 45 Average benefit percentage test: Met since average benefit is 70% (16.22%/23.17% = 70%) 401(a)(4) is satisfied since rate group passes coverage 57 57

58 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 Note: The plan is top-heavy 58 58

59 Plan Design #5 Safe Harbor 401(k) Participants HCEs Employed last day W-2 Wages W-2 Entry Date Elective Deferral 3% Safe Harbor Profit Sharing 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

60 Plan Design #5 Safe Harbor 401(k) Elective Deferral Limit: Participants HCEs W-2 Wages Elective Deferrals 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 Deferral = $18,500 Catch-up = $6,

61 Plan Design #5 Safe Harbor 401(k) ADP & ACP Tests & Minimum Coverage 401(k) Plan 401(k) portion 401(m) portion ADP test deemed satisfied (safe harbor) Coverage: All nonexcludable NHCEs benefiting N/A (no match) 61 61

62 Plan Design #5 Safe Harbor 401(k) Top-Heavy Minimum: Non-Keys W-2 Wages 3% Safe Harbor 1.87% Profit Sharing Top- Heavy Sue $75,000 $2,250 $1,402 $0 Tom $30,000 $450 $280 $170 Vic is not employed on the last day is not eligible for top-heavy minimum Employer contributions to Sue satisfy required minimum Additional contribution to satisfy top-heavy minimum 62 62

63 Plan Design #5 Safe Harbor 401(k) 415 Limit: Participants W-2 Wages Elective Deferrals 3% Safe Harbor 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 No participant exceeds their 415 limit 63 63

64 Plan Design #5 Safe Harbor 401(k) 401(a) Minimum Coverage: Participants 3% 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) Test is met since all NHCEs are benefiting under the 401(a) portion of the plan 64 64

65 Plan Design #5 Safe Harbor 401(k) 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 65 65

66 Plan Design #5 Safe Harbor 401(k) Gateway Test: Participants HCEs NHCEs W-2 Entry Date 3% Safe Harbor Profit Sharing Top- Heavy Allocation Rate Patti $250,000 $7,500 $29,000 $0 14.6% Ron $250,000 $7,500 $29,000 $0 14.6% Sue $75,000 $2,250 $1,402 $0 4.87% Tom $15,000 $450 $280 $ % Vic $20,000 $600 $0 $0 3.0% NHCE gateway allocation: 14.6% x 1/3 = 4.87% Increase profit sharing to 1.87% = $

67 Plan Design #5 Safe Harbor 401(k) 415 Limit: Participants W-2 Wages Elective Deferrals 3% Safe Harbor 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 No participant exceeds their 415 limit with the additional gateway contribution 67 67

68 Plan Design #5 Safe Harbor 401(k) Gateway Test: Participants HCEs NHCEs W-2 Entry Date 3% Safe Harbor Profit Sharing Top- Heavy Allocation Rate Patti $250,000 $7,500 $29,000 $0 14.6% Ron $250,000 $7,500 $29,000 $0 14.6% Sue $75,000 $2,250 $1,402 $0 4.87% Tom $15,000 $450 $280 $ % Vic $20,000 $600 $374 $0 4.87% NHCE gateway allocation: 14.6% x 1/3 = 4.87% 68 68

69 Plan Design #5 Safe Harbor 401(k) Cross- Testing: Participants HCEs EBAR 4.51% Rate Group Patti (54) 4.51% X 5.30% Rate Group 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 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 satisfied since each rate group passes coverage 69 69

70 Plan Design #6 Traditional 401(k) Doc & Company 401(k) Plan Plan year & limitation year: Calendar year st 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 (1 st 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 (1 st year = current year) Nonelective: Pro rata (0%) Nonelective conditions: None Top-heavy minimum: Non-key employees employed on last day of year 70 70

71 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 71 71

72 Plan Design #6 Traditional 401(k) Elective Deferral Limits: Participants W-2 Wages Elective Deferrals Doc (58) $200,000 $20,000 Deferral = $18,500 Catch-up = $1, (g) limit Mrs. (53) $100,000 $12,000 Abe $20,000 $800 Deferral = $10,000 Catch-up = $2,000 Plan limit Betty $70,000 $7,700 Connie $10,000 $

73 Plan Design #6 Traditional 401(k) ADP & ACP Testing Methods Current Year Data Prior Year Data Current Year Method HCEs & NHCEs Prior Year Method HCEs NHCEs 73 73

74 Plan Design #6 Traditional 401(k) ADP Test: Participant Last Day? Hours W-2 Wages Deferrals ADR Doc (58) Yes 2,000 $200,000 $18, % Mrs. (53) Yes 2,000 $100,000 $10, % HCE ADP 9.63% Abe Yes 900 $20,000 $ % Betty Yes 2,000 $70,000 $7, % Connie No 400 $10,000 $ % *Because of 1 st year election, used for ADP test for the 1 st and 2 nd plan years NHCE ADP* 5.63% % Fail 2x or % 74 74

75 Plan Design #6 Traditional 401(k) Failed ADP Test Excess contribution = $5,610 (fully attributed to Doc) Catch-up contribution = Catch-up limit $6, (g) excess ($1,500) Remaining amount $4,500 Corrective distribution to Doc = $1,110 plus allocable earnings No related matching contributions 75 75

76 Plan Design #6 Traditional 401(k) ACP Test: Participant Last Day? Hours W-2 Wages Match ACR Doc Yes 2,000 $200,000 $10, % Mrs. Yes 2,000 $100,000 $5, % HCE ACP 5.00% Abe Yes 900 $20,000 $ % Betty Yes 2,000 $70,000 $3, % Connie No 400 $10,000 $0 0.00% *Because of 1 st year election, used for ACP test for the 1 st and 2 nd plan years NHCE ACP* 4.50% % Pass 2x or % 76 76

77 Plan Design #6 Safe Harbor 401(k) 401(k) & 401(m) Minimum Coverage: 401(k) Plan 401(k) portion 401(m) portion All nonexcludable NHCEs benefiting All nonexcludable NHCEs benefiting 77 77

78 Plan Design #6 Traditional 401(k) Top-Heavy Status Non-key Employees = 38% of account balances Used to determine top-heavy status for 1 st and 2 nd plan years Key Employees = 62% of account balances 78 78

79 Plan Design #6 Safe Harbor 401(k) Top-Heavy Minimum: Non-Keys W-2 Wages Match 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 79 79

80 Plan Design #6 Traditional 401(k) 415 Limit: Participant W-2 Wages Deferrals Match Annual 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 No participant exceeds their 415 limit 80 80

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 81 81

82 Plan Design #7 Traditional 401(k) Participant Last Day? Hours W-2 Wages Deferrals Match HCE/Key Profit Sharing 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 82 82

83 Plan Design #7 Traditional 401(k) Elective Deferral Limits: Participants W-2 Wages Elective 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 = $18,500 Excess = $

84 Plan Design #7 Traditional 401(k) ADP Test: Participant W-2 Wages Deferrals ADR Dan (49) $275,000 $19, % HCE ADP 7.00% Eli $30,000 $1, % Faye $40,000 $3, % Glen $10,000 $ % Hal $20,000 $0 0.00% NHCE ADP 4.00% % Fail 2x or % 84 84

85 Plan Design #7 Traditional 401(k) Failed ADP Test Correction Options: Distribution of excess contribution = $2,750 plus allocable earnings (coordinate with distribution of $750 excess deferral), or 1% QNEC Participant W-2 Wages Deferrals QNEC ADR to NHCEs Eli $30,000 $1,800 $ % ($1,000) Faye $40,000 $3,200 $ % Glen $10,000 $200 $ % Hal $20,000 $0 $ % NHCE ADP 5.00% Pass 2x or % 85 85

86 Plan Design #7 Traditional 401(k) ACP Test: Participant W-2 Wages Match ACR Dan $275,000 $8, % HCE ACP 3.00% Eli $30,000 $ % Faye $40,000 $1, % Glen $10,000 $ % Hal $20,000 $0 0.00% NHCE ACP 2.00% % Pass 2x or % 86 86

87 Plan Design #7 Traditional 401(k) 401(k) & 401(m) Minimum Coverage: 401(k) Plan 401(k) portion 401(m) portion All nonexcludable NHCEs benefiting All nonexcludable NHCEs benefiting 87 87

88 Plan Design #7 Traditional 401(k) Top-Heavy Minimum: Non-Keys W-2 Wages QNEC 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 88 88

89 Plan Design #7 Traditional 401(k) 415 Limit: Participant W-2 Wages Deferrals 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 No participant exceeds their 415 limit 89 89

90 Plan Design #7 Traditional 401(k) 401(a) Minimum Coverage: Participant Last Day? Hours Profit Sharing QNEC 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 Test is met since all NHCEs are benefiting under the 401(a) portion of the plan 90 90

91 Plan Design #7 Traditional 401(k) 401(a)(4) Nondiscrimination Test: 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 * 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 91 91

92 Plan Design #7 Traditional 401(k) 401(a)(4) General Test: Participants HCEs NHCEs W-2 Wages QNEC Profit Sharing Allocation Rate Dan $275,000 $0 $11,000 4% 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% 92 92

93 Plan Design #7 Traditional 401(k) 401(a)(4) General Test: Participants HCEs NHCEs Allocation Rate 4% Rate Group Dan 4% X Eli 5% X Faye 5% X Glen 1% Hal 5% X 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 93 93

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: None Note: The plan is not top-heavy 94 94

95 Plan Design #8 Traditional 401(k) Participant Last Day? Hours W-2 Wages Deferrals Match HCE/Key Profit Sharing 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 $

96 Plan Design #8 Traditional 401(k) Elective Deferral Limits: Participants W-2 Wages Elective 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 96 96

97 Plan Design #8 Traditional 401(k) ADP Test: Participant W-2 Wages Deferrals ADR Jan $275,000 $6, % Kit $175,000 $10, % HCE ADP 4.00% Lou $100,000 $3, % May $10,000 $0 0.00% Ned $30,000 $ % NHCE ADP 1.50% % Fail 2x or % 97 97

98 Plan Design #8 Traditional 401(k) Failed ADP Test Excess contribution = $3,500 (attributed fully to Kit) No related matching contributions Correction options 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 98 98

99 Plan Design #8 Traditional 401(k) 401(k) & 401(m) Minimum Coverage: 401(k) Plan 401(k) portion 401(m) portion All nonexcludable NHCEs benefiting N/A (no match) 99 99

100 Plan Design #8 Traditional 401(k) 415 Limit: Participant W-2 Wages Deferrals 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 No participant exceeds their 415 limit

101 Plan Design #8 Traditional 401(k) 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 Plan Design #8 Traditional 401(k) 415 Limit: Participant W-2 Wages Deferrals 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 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

103 Plan Design #8 Traditional 401(k) ADP Test: Participant W-2 Wages Deferrals ADR Jan $275,000 $0 0.00% Kit $175,000 $10, % HCE ADP 2.91% Lou $100,000 $3, % May $10,000 $0 0.00% Ned $30,000 $ % NHCE ADP 1.50% % Pass 2x or %

104 Plan Design #8 Traditional 401(k) 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

105 Plan Design #8 Traditional 401(k) 401(a) Minimum Coverage: Participant Last Day? 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% Ratio percentage test fails, but average benefits test passes minimum coverage satisfied

106 Plan Design #8 Traditional 401(k) Gateway Test: Participants HCE NHCEs W-2 Wages Profit Sharing Allocation Rate Jan $275,000 $55,000 20% Kit $175,000 $26,250 15% Lou $100,000 $5,000 5% May $10,000 $0 0% Ned $30,000 $1,500 5% NHCE gateway allocation = 5% gateway satisfied and can proceed to cross-testing Did not receive a nonelective allocation not subject to gateway test

107 Plan Design #8 Traditional 401(k) Cross- Testing: HCE/Key EBAR 5.69% Rate Group Jan (55) 5.69% X 7.27% Rate Group Kit (49) 7.27% X X NHCEs Lou (38) 5.69% X May (30) 0.00% Ned (26) 15.15% X X Modified nondiscriminatory classification test: Met since ratio percentage of 66.67% is midpoint of 45 Average benefit percentage test: Met since plan s average benefit is 70% (9.60%/7.10% = %) 401(a)(4) is satisfied since each rate group passes covered

108 Questions? 108