Advanced Nondiscrimination Testing

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1 Advanced Nndiscriminatin Testing Cverage and Nndiscriminatin Limits extent t which plans can be designed in favr f HCEs = must pass bth cverage and nndiscriminatin tests every plan year Cverage measures relative cverage f HCEs and NHCEs Nndiscriminatin measures level f benefits prvided t HCEs and NHCEs 401(a)(4) nndiscriminatin test = ER cntributins ADP test = elective deferrals ACP test = matching cntributins / after-tax Cverage Tests Three cverage tests = nly need satisfy ne test under Cde 410(b) Percentage test At least 70% f NHCEs benefit Rati test % f NHCEs > 70% % f HCEs Average benefits test Minimum cverage tests will be used t determine if rate grups are nndiscriminatry under Cde 401(a)(4) 1

2 Average Benefits Test Tw parts t average benefits test = must satisfy bth parts t pass test Nndiscriminatry classificatin test Average benefit percentage test Different rules apply fr cverage vs. nndiscriminatin Reasnable classificatin test des nt apply fr nndiscriminatin test = can categrize EEs by name Can use midpint between safe and unsafe harbrs Average Benefits Test Nndiscriminatry classificatin test Use same fractin as under rati percentage test Rati must be abve midpint between safe harbr and unsafe harbr percentage (see chart) Based n NHCE cncentratin percentage (i.e., percentage f EEs wh are NHCEs) Average benefit percentage (ABP) test NHCE average benefit percentage > 70% HCE average benefit percentage Include benefit percentages f all nn-excludable EEs Must include benefits under all plans f ER General Nndiscriminatin Each HCE rate grup must satisfy a minimum cverage test under Cde 410(b) Rate grup includes all equal r higher allcatin r equivalent benefit rates Rate grups may be expressed as allcatin rates r equivalent benefit rates If using average benefits test = special rules apply Reasnable classificatin test des nt apply May use midpint between safe harbr and unsafe harbr 2

3 Crss-Testing Overview Crss-testing is prcess f cnverting cntributins t equivalent benefit rates (DC plan) r benefits t equivalent allcatin rates (DB plans) May crss-test fr purpses f cverage and/r nndiscriminatin testing If crss-test fr nndiscriminatin testing = must satisfy minimum gateway requirements Gateway cntributin nt required if nly crss-testing fr minimum cverage test Gateway cntributin must be prvided t all benefiting NHCEs t use crss-testing fr nndiscriminatin test Crss-Testing Overview Cntributins are prjected t testing age using interest rate between 7.5% - 8.5% Multiply cntributin by 1.085^N where N equals the number f years t testing age Cnvert prjected cntributin t single life annuity Divide prjected cntributin by annuity factr Fr plan using 8.5% interest factr and UP 1984 mrtality table = factr is Equivalent benefit rate (EBR) = divide prjected annuity by 414(s) cmpensatin Minimum Gateway Requirements Gateway test = t use crss-testing fr discriminatin testing, plan must satisfy ne f gateway tests: All benefiting NHCEs must receive at least 5% allcatin (based n 415(c) cmpensatin) OR Lwest allcatin t any NHCE must be at least 1/3 f highest allcatin t any HCE (based n any definitin f 414(s) cmpensatin) Example. If highest HCE rate is 12%, lwest NHC rate must be 4%. If highest HCE rate is 18%, lwest NHC rate must be 5%. 3

4 Minimum Gateway Requirements One-third gateway test EE s allcatin fr plan year derived frm ER cntributins (ther than match) and frfeitures, divided by 414(s) cmpensatin 5% gateway test Gateway cntributin determined n basis f Cde 415 cmpensatin May use partial-year cmpensatin Must be grssed up fr all pre-tax deferrals IRS wants t ensure maximum amunt f cmpensatin taken int accunt fr 5% gateway New Cmp/SH 401(k) Plan EE Age Cmp. Deferral Allc. Allc % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% NHCE 7 27 $30,000 $0 $1, % 12.30% NHCE 8 24 $25,000 $0 $1, % 15.70% Ttal $1,485,000 $79,000 $135,378 Plan must be tested under general nndiscriminatin test n the basis f EBRs Rate Grup Testing NHCE cncentratin % = 8/13 = 61.54% 4

5 Nndiscriminatry Classificatin Test NHCE cncent. SH % UH % Midpint NHCE cncent. SH % UH % Midpint , , , Rate Grup Testing NHCE cncentratin % = 8/13 = 61.54% Midpint % = 44.25% HCE 2 = 9.63% rate HCE 1 = 4.26% rate NHCE % = 2/8 = 25% NHCE % = 6/8 = 75% = 125% = 93.75% HCE % = 1/5 = 20% HCE % = 4/5 = 80% Dr. Akey = 9.22% rate Dr. Hurtz = 3.76% rate NHCE % = 2/8 = 25% NHCE % = 6/8 = 75% = 62.5% = 75% HCE % = 2/5 = 40% HCE % = 5/5 = 100% Dr. Payne = 5.65% rate NHCE % = 5/8 = 62.5% = % HCE % = 3/5 = 60% New Cmp/SH 401(k) Plan EE Age Cmp. Deferral Allc. Allc % EBR Adj. EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% 5.69% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% 8.55% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% 13.96% HCE 1 40 $160,000 $10,000 $7, % 4.26% 10.30% HCE 2 30 $120,000 $12,000 $5, % 9.63% 31.49% NHCE 1 55 $100,000 $3,000 $4, % 1.25% 2.11% NHCE 2 50 $85,000 $0 $3, % 1.88% 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% 5.01% NHCE 7 27 $30,000 $0 $1, % 12.30% 12.30% NHCE 8 24 $25,000 $0 $1, % 15.70% 15.70% Ttal $1,485,000 $79,000 $135,378 Must include all cntributins under all plans fr ABPT 5

6 Rate Grup Testing Average benefit percentage test = average HCE benefits must nt be mre than 70% f average NHCE benefits Must include deferrals in average benefits Average benefit percentage test NHCE rati = (2.11% % % % % % % %) / 8 = 7.25% HCE rati = (5.69% % % % %) / 5 = 14.00% Average benefit rati = 7.25% / 14.00% = 51.77% Crrectin Optins T crrect vilatin f average benefits percentage test will need t make additinal cntributin fr rank and file emplyees May wish t imprve plan design t encurage rank and file emplyees t defer under plan Educatin / cmmunicatin Hardships / lans QACA plan design Safe harbr match Crrectin Optins Increase cntributins t NHCEs in rder t satisfy ABPT Des plan need t be amended t increase benefits? Depends n plan design = e.g., separate grups If s, can plan be amended after end f plan year? Can amendment prvide fr increased benefits t specific emplyees by name? Culd plan be amended t reduce cntributins t HCEs? If haven t made cntributins = culd reduce cntributins t satisfy cverage test 6

7 1.401(a)(4)-11(g) Amendment Can amend plan within 9½ mnths after end f Plan Year t crrect vilatin Amendment may nt reduce benefits under Plan Increase in benefits must satisfy 401(a)(4) independently Always satisfied if increase is fr NHCEs nly Amendment must have substance cannt apply increase t terminated nnvested EEs Can amend plan t prvide additinal cntributin necessary t pass discriminatin New Cmp/SH 401(k) Plan EE Age Cmp. Deferral Allc. Allc % EBR Adj. EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% 5.69% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% 8.55% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% 13.96% HCE 1 40 $160,000 $10,000 $7, % 4.26% 10.30% HCE 2 30 $120,000 $12,000 $5, % 9.63% 31.49% NHCE 1 55 $100,000 $3,000 $6, % 1.71% 2.56% NHCE 2 50 $85,000 $0 $5, % 2.57% 2.57% NHCE 3 35 $47,000 $0 $2, % 8.72% 8.72% NHCE 4 35 $42,000 $0 $2, % 8.72% 8.72% NHCE 5 32 $42,000 $0 $2, % 11.14% 11.14% NHCE 6 38 $39,000 $0 $2, % 6.83% 6.83% NHCE 7 27 $30,000 $0 $1, % 16.76% 16.76% NHCE 8 24 $25,000 $0 $1, % 21.40% 21.40% Ttal $1,485,000 $79,000 $141,927 Culd plan prvide additinal cntributin t all NHCEs in sufficient amunt t satisfy ABPT? Rate Grup Testing Average benefit percentage test = average HCE benefits must nt be mre than 70% f average NHCE benefits Must include deferrals in average benefits Average benefit percentage test NHCE rati = (2.56% % % % % % % %) / 8 = 9.84% HCE rati = (5.69% % % % %) / 5 = 14.00% Average benefit rati = 9.84% / 14.00% = 70.29% 7

8 New Cmp/SH 401(k) Plan EE Age Cmp. Deferral Allc. Allc % EBR Adj. EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% 5.69% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% 8.55% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% 13.96% HCE 1 40 $160,000 $10,000 $7, % 4.26% 10.30% HCE 2 30 $120,000 $12,000 $5, % 9.63% 31.49% NHCE 1 55 $100,000 $3,000 $4, % 1.25% 2.11% NHCE 2 50 $85,000 $0 $3, % 1.88% 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% 5.01% NHCE 7 27 $30,000 $0 $1, % 12.30% 12.30% NHCE 8 24 $25,000 $0 $2, % 36.14% 36.14% Ttal $1,485,000 $79,000 $136,810 Culd plan prvide additinal benefits nly t NHCE8 sufficient t satisfy ABPT? Rate Grup Testing Average benefit percentage test = average HCE benefits must nt be mre than 70% f average NHCE benefits Must include deferrals in average benefits Average benefit percentage test NHCE rati = (2.11% % % % % % % %) / 8 = 9.80% HCE rati = (5.69% % % % %) / 5 = 14.00% Average benefit rati = 9.80% / 14.00% = 70.02% New Cmp/SH 401(k) Plan EE Age Cmp. Deferral Allc. Allc % EBR Adj. EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% 5.69% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% 8.55% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% 13.96% HCE 1 40 $160,000 $10,000 $7, % 4.26% 10.30% HCE 2 30 $120,000 $12,000 $5, % 9.63% 31.49% NHCE 1 55 $100,000 $3,000 $4, % 1.25% 2.11% NHCE 2 50 $85,000 $0 $3, % 1.88% 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% 5.01% NHCE 7 27 $30,000 $0 $1, % 12.30% 12.30% NHCE 8 24 $25,000 $1,500 $1, % 15.70% 37.11% Ttal $1,485,000 $80,500 $135,378 Can als crrect prblem by having HCEs stp deferring (r having NHCEs increase deferrals) under plan = wuld nly apply fr future years 8

9 Rate Grup Testing Average benefit percentage test = average HCE benefits must nt be mre than 70% f average NHCE benefits Must include deferrals in average benefits Average benefit percentage test NHCE rati = (2.11% % % % % % % %) / 8 = 9.92% HCE rati = (5.69% % % % %) / 5 = 14.00% Average benefit rati = 9.92% / 14.00% = 70.89% Any Other Optins? Rate Grup Testing NHCE cncentratin % = 8/13 = 61.54% Midpint % = 44.25% HCE 2 = 9.63% rate HCE 1 = 4.26% rate NHCE % = 2/8 = 25% NHCE % = 6/8 = 75% = 125% = 93.75% HCE % = 1/5 = 20% HCE % = 4/5 = 80% Dr. Akey = 9.22% rate Dr. Hurtz = 3.76% rate NHCE % = 2/8 = 25% NHCE % = 6/8 = 75% = 62.5% = 75% HCE % = 2/5 = 40% HCE % = 5/5 = 100% Dr. Payne = 5.65% rate NHCE % = 5/8 = 62.5% = % HCE % = 3/5 = 60% 9

10 New Cmp/SH 401(k) Plan EE Age Cmp. Deferral Allc. Allc % EBR Adj. EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% 5.69% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% 8.55% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% 13.96% HCE 1 40 $160,000 $10,000 $7, % 4.26% 10.30% HCE 2 30 $120,000 $12,000 $5, % 9.63% 31.49% NHCE 1 55 $100,000 $3,000 $4, % 1.25% 2.11% NHCE 2 50 $85,000 $0 $3, % 1.88% 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% 6.40% NHCE 5 32 $42,000 $0 $2, % 9.23% 9.23% NHCE 6 38 $39,000 $0 $1, % 5.01% 5.01% NHCE 7 27 $30,000 $0 $1, % 12.30% 12.30% NHCE 8 24 $25,000 $0 $1, % 15.70% 15.70% Ttal $1,485,000 $79,000 $135,617 Culd prvide additinal cntributin t NHCE5 in rder t bring NHCE5 int Dr. Akey s rate grup Rate Grup Testing NHCE cncentratin % = 8/13 = 61.54% Midpint % = 44.25% HCE 2 = 9.63% rate HCE 1 = 4.26% rate NHCE % = 2/8 = 25% NHCE % = 6/8 = 75% = 125% = 93.75% HCE % = 1/5 = 20% HCE % = 4/5 = 80% Dr. Akey = 9.22% rate Dr. Hurtz = 3.76% rate NHCE % = 3/8 = 37.5% NHCE % = 6/8 = 75% = 93.75% = 75% HCE % = 2/5 = 40% HCE % = 5/5 = 100% Dr. Payne = 5.65% rate NHCE % = 5/8 = 62.5% = % HCE % = 3/5 = 60% New Cmp / SH 401(k) Plan EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 Suppse NHCE 7 and 8 terminate emplyment 10

11 Testing Alternatives Using different definitins f cmpensatin = can use any definitin that satisfies Cde 414(s) Participatin cmpensatin Net cmpensatin Average cmpensatin Tp-paid grup test Imputing permitted disparity Accrued t date methd Plan restructuring Tp Paid Grup Test EE must have cmpensatin > dllar amunt in lkback year and must be in tp-paid grup Tp 20% f EEs ranked by cmpensatin Electin must be made in plan Allws plan t treat HCEs ver 20% threshld as NHCEs Be careful when defining allcatin grups t ensure HCEs d nt lse benefits Once becme NHCE = must receive gateway When must tp paid grup electin be made? End f year/beginning f year/9½ mnths New Cmp / SH 401(k) Plan EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 20% x 11 = 2.2. Therefre, can treat 2 HCEs as NHCEs 11

12 Imputing Permitted Disparity Takes int accunt the fact that HCEs d nt receive SS n all cmpensatin By imputing permitted disparity NHCEs EBRs are increased at greater rate than HCE EBRs D nt have t be using permitted disparity can use in rate grup test Cannt use imputed permitted disparity with deferrals, matching cntributins r SH cntributins Average Cmpensatin D nt have t use nly current year cmp Regulatins permit rate grups t be determined n basis f average cmp Can use average cmpensatin ver perid f at least 3 years Des nt have t be defined in plan dcument Using average cmp cmpared t current cmp may imprve test results NHCEs ften have higher increases (as percentage f cmp) than HCEs = results in lwer average New Cmp / SH 401(k) Plan EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 12

13 HCE 2 s cmpensatin histry 2015 $120, $110, $105, $100, $100,000 Example Average cmpensatin = $107,000 New EBR fr HCE 2 = 10.80% (instead f 9.63%) Example NHCE 5 s cmpensatin histry 2015 $42, $36, $30, $28,000 (Year f hire) Average cmpensatin = $34,000 New EBR fr NHCE 5 = $10.10% (instead f 8.18%) Example Can have significant impact if have NHCE hired during measurement perid with lw cmpensatin NHCE 5 s cmpensatin histry 2015 $42, $36, $30, $12,000 (Year f hire) Average cmpensatin = $30,000 New EBR fr NHCE 5 = $11.45% (instead f 8.18%) 13

14 Accrued t Date Methd Instead f using current cntributin, can determine rate grups based n increase in A/B during measurement perid Only take int accunt years in which EE benefits under plan Increase in A/B is divided by number f years in measurement perid Need t have prper data (including years in which EE participated) Gains r lsses attributable t cntributins and frfeitures allcated during the measuring perid are taken int accunt Plans may be restructured int cmpnent plans fr purpses f cverage and nndiscriminatin testing Can be useful in certain circumstances t allw plan t pass withut having t prvide additinal benefits Can be very helpful where have yung HCE r family member f wner may nt be used t avid gateway = must prvide gateway t all NHCEs Each cmpnent plan must separately satisfy cverage If cmpnent plan satisfies cverage = can be tested separately fr nndiscriminatin Plan can be restructured differently each year in any manner Each participant must be in ne cmpnent plan N plan amendment is required = restructuring ccurs nly fr testing purpses Prbably will need t satisfy 70% cverage test unless have reasnable classificatin 14

15 EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 Plan can be restructured int cmpnent plans = Plan #1 includes HCE2 and NHCE1 and NHCE2. Divide plan int 2 plans and test separately fr cverage and nndiscriminatin Can use different nndiscriminatin testing methds fr each plan Plan #1 = yung HCE and 2 lder NHCEs HCEs = 1/5 = 20%; NHCEs = 2/6 = 33.33% 33.33%/20% = % = Passes rati cverage test Since all EEs receive 5% allcatin = passes unifrm nndiscriminatin test EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 Plan can be restructured int cmpnent plans = Plan #2 includes Drs., HCE1 and remaining NHCEs 15

16 Divide plan int 2 plans and test separately fr cverage and nndiscriminatin Plan #2 = 3 dctrs, HCE 1 and 4 yunger NHCEs HCEs = 4/5 = 80%; NHCEs = 4/6 = 66.67% 66.67%/80% = 83.34% = passes rati cverage test Plan is crss-tested = will need t increase benefit fr NHCE5 t pass reasnable classificatin test Still may have t deal with ABP test EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $1, % 8.18% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 Plan can be restructured int cmpnent plans = Plan #2 includes Drs., HCE1 and remaining NHCEs EE Age Cmp. Defer Ttal ER Cntrib Allc. % EBR Dr. Hurtz 55 $265,000 $18,000 $35, % 3.76% Dr. Payne 50 $265,000 $18,000 $35, % 5.65% Dr. Akey 44 $265,000 $18,000 $35, % 9.22% HCE 1 40 $160,000 $10,000 $7, % 4.26% HCE 2 30 $120,000 $12,000 $5, % 9.63% NHCE 1 55 $100,000 $3,000 $4, % 1.25% NHCE 2 50 $85,000 $0 $3, % 1.88% NHCE 3 35 $47,000 $0 $2, % 6.40% NHCE 4 35 $42,000 $0 $1, % 6.40% NHCE 5 32 $42,000 $0 $2, % 9.22% NHCE 6 38 $39,000 $0 $1, % 5.01% $1,430,000 $79,000 $134,656 Plan can be restructured int cmpnent plans = Plan #2 includes Drs., HCE1 and remaining NHCEs. 16

17 NHCE cncentratin % = 6/11 = 54.55% Midpint % = 45% Dr. Akey = 9.22% rate Dr. Payne = 5.65% rate NHCE % = 1/6 = 16.67% NHCE % = 3/6 = 50% = 83.33% = 125% HCE % = 1/5 = 20% HCE % = 2/5 = 40% HCE1 = 4.84% rate Dr. Hurtz = 3.76% rate NHCE % = 4/6 = 66.67% NHCE % = 4/6 = 66.67% = % = 83.33% HCE % = 3/5 = 60% HCE % = 4/5 = 80% N need t perfrm ABP test since all rate grups satisfy rati test Include all nnexcludible EEs in rate grups Include EEs in Plan #1 as nt benefiting in any rate grup Plan Design Optins Place each EE in wn grup Gives ER flexibility t prvide different cntributins fr different EEs Be careful if using separate grups fr partnership Nt aware f IRS challenging such a plan design Eliminate any minimum age requirement = want yunger NHCEs in plan If 401(k) SH plan = d nt include HCEs in SH cntributin Gives flexibility nt t give SH cntributin t HCEs = e.g., where have yung HCE Plan Design Optins Eliminate any last day/1000 HOS requirement = especially if using separate grups May want t give yunger terminated EEs an additinal cntributin If have last day / 1,000 HOS requirement = plan shuld prvide fr additinal gateway cntributin May want t use tp-paid grup definitin f HCEs 17