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THE LIFE OF A PLAN CASE STUDY Testing

Darren Holsey, ERPA, APA, QPA, QKA

Premier Retirement Plan Services

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Darren Holsey, ERPA, APA, QPA, QKA Premier Retirement Plan Services

Darren Holsey is an owner and senior consultant at Premier

Retirement Plan Services in Wilsonville, Oregon. He is an

Enrolled Retirement Plan Agent, is a member of NIPA

holding an APA designation and a member of ASPPA

holding a QPA and QKA. Darren served on the NIPA

education/examination committee for nearly a decade. He

currently is on the NIPA Board of Directors and has been on

the NAFE planning committee for many years as both

member and chair. Away from retirement plans, Darren is

an avid water sports enthusiast including wakeboarding,

waterskiing, surfing and paddle boarding. If you’re in the

northwest and want to play on the water, he’s always

looking for an excuse to go out.

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Case Study Assumptions

• 2nd of a six part case study going through a sample life of

a retirement plan (setup, testing, acquisition, corrections,

cash balance and termination)

• The current IRS limits for 2016 will be used for all of the

case study sessions

• Not focusing on the choice of investment provider or

recordkeeper but will assume non-bundled TPA platform

4

The Initial Test Subject

• Sample Company, LLC

• LLC taxed as a partnership with husband and wife 50/50

members

• Started with a SIMPLE plan (match) because advisor

buddy said it would be “easy” to have a plan with “no”

costs

• Committed to the idea of having a plan

• Successful years prompt their CPA to encourage them to

find a way to shelter more income from taxes

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Sample Company, LLC First Year Census 2016

Dare of birth Date of hire Date of term hours gross pay 401k Roth safe harbor

Robert 7/14/1959 3/1/2014 300,000.00 24,000.00 - 4,800.00

Beverly 10/6/1959 3/1/2014 300,000.00 24,000.00 - 4,800.00

Jim 2/16/1984 10/17/2014 2,080 70,000.00 1,000.00 6,000.00 2,800.00

Sara 3/24/1988 3/1/2015 1,200 25,000.00 - - -

Eve 1/13/1955 1/3/2015 2,080 48,000.00 4,000.00 - 1,600.00

Clara 11/12/1981 6/6/2014 2,080 55,000.00 500.00 3,000.00 1,200.00

James 6/16/1964 3/1/2014 1,660 41,000.00 - - -

Terry 2/3/1974 3/1/2014 3/2/2016 480 10,000.00 1,200.00 - 100.00

Carrie 10/27/1974 10/17/2014 2,080 66,000.00 4,800.00 - 1,200.00

Sally 4/7/1985 1/3/2015 2,080 42,000.00 - - -

Steve 7/17/1984 9/15/2014 2,080 40,000.00 400.00 800.00 1,200.00

Kia 8/2/1990 9/15/2014 400 8,000.00 - - -

Alex 12/9/1996 7/6/2015 2,080 30,000.00 - - -

Mary 5/4/1982 8/1/2015 2,080 55,000.00 - - -

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What’s Our Plan of Action?

• Review the plan document

• Review the census

• Calculate any requested employer contributions

• Verify employer contributions with plan sponsor/CPA

• Reconcile plan activity

• Finalize administration reporting

• Prepare government filings (5500, 8955,…)

• Evaluate current plan design

• Review final reporting with plan sponsor

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Our Focus…

• Review the plan document

• Review the census

• Calculate any requested employer contributions

• Verify employer contributions with plan sponsor/CPA

• Reconcile plan activity

• Finalize administration reporting

• Prepare government filings (5500, 8955,…)

• Evaluate current plan design

• Review final reporting with plan sponsor

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STEP 1: Review The Plan Document

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Review The Plan Document

The plan was initially designed with the following features:

• Eligibility

• Statutory exclusions only

• Split eligibility

• Deferrals – 60 days of service, age 21, entry 1st of the month

• Employer – 1 year of service, age 21, dual entry

• All employees hired on or before 1/1/16 are eligible regardless of

age/service requirements

• Compensation

• W2 pay with pre-tax deferrals added back in

• No exclusions except pre-entry compensation

• Normal Retirement Age = 65

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Review The Plan Document

• Deferrals

• Pre-tax, Roth and Catch-up

• Safe Harbor

• Matching for all eligible employees

• Enhanced Match (100% of 1st 4%)

• Based upon plan year

• Regular Matching

• Discretionary

• Satisfies ACP safe harbor

• Not to exceed 4% of pay or based upon deferrals over 6%

• Based upon plan year

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Review the Plan Document

• Profit Share

• Discretionary

• New Comparability

• Each participant defines his/her own group

• Accrual Requirements

• None for either regular match or profit share

For contribution calculations and testing, we won’t really

need anything beyond this

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The Design Study Based on 2015

Profit Share 401(k) Catch-Up Safe Harbor Match TOTAL

(subject to vesting) Deferrals Deferrals (100% of 1st 4%) CONTRIBUTIONS

Participant

Eligible

Compensation

Date of

Birth HCEs Contribution

Percent of

Pay

Accrual

Rates Contribution

Percent of

Pay Contribution

Percent of

Pay Contribution

Percent of

Pay Contribution

Percent of

Pay

Accrual

Rates

Robert 265,000.00 7/14/59 1 24,400.00 9.21 2.22% 18,000.00 6.79 6,000.00 2.26 10,600.00 4.00 59,000.00 22.26 4.83%

Beverly 265,000.00 10/6/59 1 24,400.00 9.21 2.22% 18,000.00 6.79 6,000.00 2.26 10,600.00 4.00 59,000.00 22.26 4.83%

Jim 66,000.00 2/16/84 1 2,025.66 3.07 5.70% 18,000.00 27.27 0.00 0.00 2,640.00 4.00 22,665.66 34.34 63.78%

Sara 24,000.00 3/24/88 1 736.60 3.07 7.90% 18,000.00 75.00 0.00 0.00 960.00 4.00 19,696.60 82.07 211.25%

Eve 44,000.00 1/13/55 0 1,350.44 3.07 0.54% 0.00 0.00 0.00 0.00 0.00 0.00 1,350.44 3.07 0.54%

Clara 52,000.00 11/12/81 0 1,595.97 3.07 4.46% 0.00 0.00 0.00 0.00 0.00 0.00 1,595.97 3.07 4.46%

James 40,000.00 6/16/64 0 1,227.67 3.07 1.12% 0.00 0.00 0.00 0.00 0.00 0.00 1,227.67 3.07 1.12%

Terry 39,000.00 2/3/74 0 1,196.98 3.07 2.52% 1,200.00 3.08 0.00 0.00 1,200.00 3.08 3,596.98 9.22 7.58%

Carrie 64,000.00 10/27/74 0 1,964.28 3.07 2.52% 4,800.00 7.50 0.00 0.00 2,560.00 4.00 9,324.28 14.57 11.97%

Sally 40,000.00 4/7/85 0 1,227.67 3.07 6.19% 0.00 0.00 0.00 0.00 0.00 0.00 1,227.67 3.07 6.19%

Steve 39,000.00 7/17/84 0 1,196.98 3.07 5.70% 600.00 1.54 0.00 0.00 600.00 1.54 2,396.98 6.15 11.42%

Kia 7,000.00 8/2/90 0 214.84 3.07 9.30% 0.00 0.00 0.00 0.00 0.00 0.00 214.84 3.07 9.30%

Alex 14,000.00 12/9/96 0 429.69 3.07 15.17% 0.00 0.00 0.00 0.00 0.00 0.00 429.69 3.07 15.17%

Mary 23,000.00 5/4/82 0 705.91 3.07 4.84% 0.00 0.00 0.00 0.00 0.00 0.00 705.91 3.07 4.84%

Totals: 982,000.00 62,672.69 78,600.00 12,000.00 29,160.00 182,432.69

Total HCE benefits: 51,562.26 72,000.00 12,000.00 24,800.00 HCEs receive 87.90%

Total NHCE benefits: 11,110.43 6,600.00 0.00 4,360.00

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The Design Study Based on 2015

• We used a safe harbor match rather than a non-elective

safe harbor since the sponsor liked the “idea” of matching

those that wanted to participate and there was likely

going to be very little staff deferral participation

• With the two children in the plan, we may need to use

component testing to satisfy 401(a)(4)

• We maximized the owners with the minimum funding

required for staff

• If staff deferral participation stays low we may be able to

stack a regular match on the safe harbor match to reduce

the staff down to the 3% top heavy minimum threshold

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STEP 2: Review The 2016 Census

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Review The 2016 Census

Dare of birth Date of hire Date of term hours gross pay 401k Roth safe harbor

Robert 7/14/1959 3/1/2014 120,000.00 24,000.00 - 4,800.00

Beverly 10/6/1959 3/1/2014 120,000.00 24,000.00 - 4,800.00

Jim 2/16/1984 10/17/2014 2,080 70,000.00 1,000.00 6,000.00 2,800.00

Sara 3/24/1988 3/1/2015 1,200 25,000.00 - - -

Eve 1/13/1955 1/3/2015 2,080 48,000.00 4,000.00 - 1,600.00

Clara 11/12/1981 6/6/2014 2,080 55,000.00 500.00 3,000.00 1,200.00

James 6/16/1964 3/1/2014 1,660 41,000.00 - - -

Terry 2/3/1974 3/1/2014 3/2/2016 480 10,000.00 1,200.00 - 100.00

Carrie 10/27/1974 10/17/2014 2,080 66,000.00 4,800.00 - 1,200.00

Sally 4/7/1985 1/3/2015 2,080 42,000.00 - - -

Steve 7/17/1984 9/15/2014 2,080 40,000.00 400.00 800.00 1,200.00

Kia 8/2/1990 9/15/2014 400 8,000.00 - - -

Alex 12/9/1996 7/6/2015 2,080 30,000.00 - - -

Mary 5/4/1982 8/1/2015 2,080 55,000.00 - - -

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What if anything do we need to check?

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• We know the company is an LLC, so the fact that they

listed compensation for the two member employees is

questionable

• They have given us their funded safe harbor match for

2016

• There is one terminee with under 500 hours of service

• We know everyone is eligible as of 1/1/16, and with no

new hires, we will include everyone in our calculations

• Since everyone is eligible as of 1/1/16 (no mid-year

eligibles) we can use gross compensation for everyone

• The rest of the information seems complete

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We contact the client to double check their information:

• Is the member compensation correct?

• No, they took $120,000 in draws during 2016

• What is the net self-employment income for the owners?

• We get the K1s from the sponsor/CPA

• For both owners, Box 14 income is $300,000 and there are

$1,200 of Sec. 179 expenses shown

• What plan funding is included in the K1 income?

• All of the staff safe harbor match funding shown on the census

has been included as a business expense on the K1s

• Can we get a copy of your master payroll report?

• We use this to verify staff pay and deferrals

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What other questions do we need to ask?

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• Do they want the staff to all get the same level of profit

share contribution, and do they have an amount in mind

as a minimum?

• Keep everyone as low as allowed, but everyone will benefit

• This is important since the plan is likely going to be top heavy

• Do they want the kids to get profit share?

• Yes, if possible

• Do they want the terminated employee to get any profit

share?

• No, they only want to give active employees profit share

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STEP 3: Calculate Contributions/Run Testing

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Calculate Contributions/Run Testing

• It was clear from the census information and the fact that

the owner income was not correct on it, that we need to

calculate the safe harbor match ourselves

• Since this is a safe harbor plan that requires new

comparability testing, we will be doing most of the

compliance testing at the same time we do our

calculations to determine the profit share

• We will do 410(b), 401(a)(4), 415 and look at 416 as we go

• From the census we can see that 402(g) testing is satisfied

• ADP and ACP are freebies

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Calculate Contributions/Run Testing Self Employment Calculations

• We start by determining the initial self employment

compensation number for each owner

• Box 14 income less any Sec. 179 expenses shown on the K1

• Eligible plan compensation is determined by reducing the

initial self employment compensation by

• Staff funding required

• ½ of the self employment tax

• The owner’s own employer contributions

• Since we know that it will take another $35,000 for the

owners to maximize their own contributions making their

eligible plan compensation under $265,000 we will need

to “worry” about this calculation in conjunction with our

contribution allocation

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Determining the eligible plan compensation

• First, the amount to reduce the initial self employment

compensation number for the staff costs not already

included in the K1s is simple subtraction leaving an

adjusted compensation

• Total staff employer contributions less those included in K1s

• Split this between owners based upon ownership share

• Subtract from the initial self employment compensation

• Next the ½ self employment tax deduction requires a

calculation based upon the adjusted compensation

determined in the first step leaving a further adjusted

amount

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There are two components to the ½ self employment tax

calculation

• The Social Security part and the Medicare part

• You add both parts together and divide by 2 to get ½ of

the self employment tax

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The Social Security part

• The full Social Security factor is 12.4% of “compensation”

• “Compensation” is the lesser of the Social Security

taxable wage base in effect at the beginning of the plan

year and 92.35% of the adjusted initial self employment

compensation

The Medicare part

• The full Medicare factor is 2.9% of “compensation”

• This time “compensation” is 92.35% of the adjusted initial

self employment compensation with no limit

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• The last deduction is for the self employed participant’s

own contributions, which are determined in conjunction

with running the contribution allocation itself

• And finally, once you have reduced for all three items,

you compare your final amount to the compensation limit

in effect for the beginning of the plan year, and whichever

is smaller you use for your eligible plan compensation

• So let’s look at the safe harbor match first as an example

of this calculation

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Calculate Contributions/Run Testing SE Calcs and SH Match Only

Initial K1 or Owner partner share adjusted Pre-tax/Roth safe harbor Elig Plan

W2 Income % of staff costs SE income ½ SE tax deferrals catch-up match Comp.

Robert 298,800.00 50.00% 710.00 298,090.00 11,338.65 18,000.00 6,000.00 10,600.00 265,000.00

Beverly 298,800.00 50.00% 710.00 298,090.00 11,338.65 18,000.00 6,000.00 10,600.00 265,000.00

Jim 70,000.00 7,000.00 - 2,800.00 70,000.00

Sara 25,000.00 - - - 25,000.00

Eve 48,000.00 4,000.00 - 1,920.00 48,000.00

Clara 55,000.00 3,500.00 - 2,200.00 55,000.00

James 41,000.00 - - - 41,000.00

Terry 10,000.00 1,200.00 - 400.00 10,000.00

Carrie 66,000.00 1,800.00 - 1,800.00 66,000.00

Sally 42,000.00 - - - 42,000.00

Steve 40,000.00 400.00 - 400.00 40,000.00

Kia 8,000.00 - - - 8,000.00

Alex 30,000.00 - - - 30,000.00

Mary 55,000.00 - - - 55,000.00

1,087,600.00 100.00% 1,420.00 596,180.00 22,677.30 53,900.00 12,000.00 30,720.00 1,020,000.00

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• For the staff, the safe harbor match contribution is simply

applying the 100% of the 1st 4% of pay deferred formula

• The total safe harbor match for staff is $9,520

• The funded amount already included in the K1 per the CPA is

$8,100 for staff (the number given on the census)

• That leaves $1,420 to split 50/50 between the owners and

subtract from their initial self employment compensation

Adjusted Compensation:

$298,800 – (50% x $1,420) = $298,090

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The ½ self employment tax deduction is now determined

• Social Security part

• First determine the “compensation” amount to use when applying

the 12.4% factor

• $298,090 x 92.35% = $275,286.12 (which is over $118,500)

• 12.4% x 118,500 = $14,694

• Medicare part

• 2.9% x $298,090 x 92.35% = $7,983.30

• ($14,694 + $7,983.30) / 2 = $11,338.65

Further Adjusted Compensation:

$298,090 - $11,338.65 = $286,751.35

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• For each of the owners, we now have $286,751.35 of

compensation to work with for their safe harbor match

• Since we cannot allocate contributions based on more

than $265,000 for 2016, the safe harbor match for the

owners is limited

• 4% x $265,000 = $10,600

• We determine the eligible plan compensation by

subtracting the owner’s own contributions from the further

adjusted compensation amount

$286,751.35 - $10,600 = $276,151.35

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• We limit this amount to the 2016 compensation limit of

$265,000, and we have determined the eligible plan

compensation as long as they only intend to make a safe

harbor match and no profit share

• We know that isn’t the case, however, so now we add the

profit share component to our calculations

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Calculate Contributions/Run Testing Final SE Calcs and Contributions

• If we start with $265,000 of eligible plan compensation for

the owners, we know that they will need $24,400 of

additional profit share for 2016 to maximize their total

contributions to the 415 limit

• $59,000 - $18,000 - $6,000 - $10,600 = $24,400

• But, remember when we were determining the eligible

plan compensation for the owners after the safe harbor

match, before limiting them to $265,000 we had a final

amount after all of the deductions of $276,151.35

• Reducing this number by an additional $24,400 would

leave us with less than $265,000, so we know we can’t

use this number as eligible plan compensation

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• In addition, we will have more staff contributions for profit

share that will further reduce our adjusted self

employment compensation prior to any of the other

deductions too, so we need to run the profit share

allocation, the safe harbor match calculation and the self

employment income calculations simultaneously

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So where do we start?

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• First we will run a new comparability allocation

maximizing the owners, minimizing the staff and not

giving anything to the terminee we don’t have to using

$250,000 as owner compensation

• Now here’s where all the compliance testing comes into

play

• We won’t be allocating any contributions over the 415 limits so

we will satisfy the 415 testing

• 410(b) will be satisfied for the plan too

• For deferrals and safe harbor match, 100% of the non-excludable

NHCEs are benefitting

• For profit share, there is only one terminee that they do not want to

benefit and since he is an excludable terminee (<500 hours) 100% of

the non-excludable NHCEs are benefitting

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• Likely the plan is going to be a top heavy plan based upon what

we saw in the design study ran when setting the plan up, so we

will need to give all active employees at least 3% of gross pay

(combined between safe harbor match and profit share)

• 401(a)(4) testing we will be working our way through as we run

our new comparability allocation

• We will need to include everyone in our testing since the average

benefit percentage test under 401(a)(4) requires that everyone

eligible (even excludable terminees) be counted in the test unlike

410(b)

• We have to also be aware of the gateway requirements

• We will be testing on an Equivalent Benefit Accrual Rate (EBAR) or

benefits basis

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Gateway

• In order to satisfy the gateway, each NHCE who benefits

has to receive at least 1/3rd of the highest HCE rate; or

• If the lowest NHCE has at least 5% of 415 comp, the

gateway is deemed to be satisfied.

• Anyone who benefits under 410(b) must get the gateway

• TH minimum contribution requirements and SH non-

elective contributions can change who is benefitting

• TH & SH contributions count toward the gateway

• Regular and SH matches do not count toward the

gateway

• HCEs can be excluded from the gateway

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EBAR

• It is the expression of the allocation of contributions and

forfeitures in a DC plan as an annual benefit payable as a

single life annuity at the employee’s testing age

• Calculating the EBAR requires some assumptions

• Testing age is generally the NRA in the plan

• Measurement period is generally current year

• Interest rate compounded annually 7.5% - 8.5%

• Mortality table

• Age determination generally attained age

• Compensation you can use post-entry compensation

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EBAR Calculation:

• Our testing assumptions are

• Age 65 NRA

• 8.5% interest

• Attained age at plan year-end

• UP-1984 mortality

• Annuity purchase rate of 95.4

• All based upon the current year

• For either owner we have an attained age of 57 at

12/31/16, assume $250,000 of compensation, 4% safe

harbor match of $10,000 and $25,000 of profit share

needed to maximize at the 415 limit

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EBAR Calculation:

• How many years to age 65?

• 65 – 57 = 8

• What is the monthly compensation?

• $250,000 / 12 = $20,833.33

• What is the $25,000 worth at age 65

• $25,000 x (1.085)8 = $48,015.11

• Convert to a monthly single life annuity by dividing by the

annuity purchase rate and dividing by the monthly

compensation to get the EBAR

• $48,015.11 / 95.4 / $20,833.33 = 2.42%

• Now we do this for each participant

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Eligible

Compensation Date of Birth

401(k)

Deferrals

Catch-Up

Deferrals

Safe Harbor

Match

Employer

Contribution

Percent of

Pay

Non-

Elective

Accrual

Rate

Total

Accrual

Rate

Robert 250,000.00 7/14/1959 18,000.00 6,000.00 10,000.00 25,000.00 10.00 2.42% 5.12%

Beverly 250,000.00 10/6/1959 18,000.00 6,000.00 10,000.00 25,000.00 10.00 2.42% 5.12%

Jim 70,000.00 2/16/1984 7,000.00 - 2,800.00 2,333.33 3.75 6.97% 32.97%

Sara 25,000.00 3/24/1988 - - - 833.33 3.75 9.65% 9.65%

Eve 48,000.00 1/13/1955 4,000.00 - 1,920.00 1,600.00 3.33 0.58% 2.73%

Clara 55,000.00 11/12/1981 3,500.00 - 2,200.00 1,833.33 3.33 4.85% 19.92%

James 41,000.00 6/16/1964 - - - 1,366.67 3.33 1.21% 1.21%

Terry 10,000.00 2/3/1974 1,200.00 - 400.00 - 0.00 0.00% 13.14%

Carrie 66,000.00 10/27/1974 1,800.00 - 1,800.00 2,200.00 3.33 2.74% 7.22%

Sally 42,000.00 4/7/1985 - - - 1,400.00 3.33 6.72% 6.72%

Steve 40,000.00 7/17/1984 400.00 - 400.00 1,333.33 3.33 6.19% 9.91%

Kia 8,000.00 8/2/1990 - - - 266.67 3.33 10.10% 10.10%

Alex 30,000.00 12/9/1996 - - - 1,000.00 3.33 16.48% 16.48%

Mary 55,000.00 5/4/1982 - - - 1,833.33 3.33 5.26% 5.26%

43


• For the preliminary run at $250,000 of eligible plan comp

for the owners, we need to allocate 10% to get them the

additional $25,000 needed to maximize at the 415 limit

• For the staff (not kids), in order to satisfy the gateway

requirement we need to allocate 1/3 of the highest HCE

percentage (10%) or give a 5% of pay allocation to

everyone benefitting

• We will try giving the kids a little higher amount (3.75%)

than staff

• But now, do we satisfy 401(a)(4) using the equivalent

benefit accrual rate (EBAR)?

44


401(a)(4) testing using EBARs

• Each HCE will have his or her own rate group

• The rate group consists of everyone benefitting under the profit

sharing portion of the plan that has an EBAR that is as large or

larger than the HCEs EBAR

• Each rate group must satisfy 410(b)

• Ratio percentage test – OR -

• Average benefit test (both parts)

• Nondiscriminatory classification

• Average benefit percentage test

• If all rate groups satisfy 410(b), then the profit share

allocation satisfies 401(a)(4) testing

45


---------- rate groups ----------

EBARs 2.42% 2.42% 6.97% 9.65%

Robert 2.42% 1 1 0 0

Beverly 2.42% 1 1 0 0

Jim 6.97% 1 1 1 0

Sara 9.65% 1 1 1 1

Eve 0.58% 0 0 0 0

Clara 4.85% 1 1 0 0

James 1.21% 0 0 0 0

Terry 0.00% 0 0 0 0

Carrie 2.74% 1 1 0 0

Sally 6.72% 1 1 0 0

Steve 6.19% 1 1 0 0

Kia 10.10% 1 1 1 1

Alex 16.48% 1 1 1 1

Mary 5.26% 1 1 0 0

HCEs benefitting 4 4 2 1

NHCEs benfitting 7 7 2 2

HCE% 100.00% 100.00% 50.00% 25.00%

NHCE% 70.00% 70.00% 20.00% 20.00%

ratio 70.0% 70.0% 40.0% 80.0%

46


Not all of the rate groups pass 410(b) using the ratio

percentage test, so we have to look at average benefits

• First we run the nondiscriminatory classification test

• We need the ratio percentage test percentage for each rate group

to be at least as high as the midpoint of a safe and unsafe harbor

percentage based upon the concentration percentage of NHCEs

in the test

47

Nondiscriminatory Classification Test - chart

NHCE 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

48


Not all of the rate groups pass 410(b) using the ratio

percentage test, so we have to look at average benefits

• First we run the nondiscriminatory classification test

• We need the ratio percentage test percentage for each rate group

to be at least as high as the midpoint of a safe and unsafe harbor

percentage based upon the concentration percentage of NHCEs

in the test

• If we pass part 1, then we run the average benefits

percentage test

• We need the ratio of the NHCE average total EBARs over the

HCE average total EBARs to be greater than or equal to 70%

• For now, we don’t have the Reasonable Classification to

worry about under 401(a)(4) like in coverage testing

49


Nondiscriminatory classification test

• The concentration percentage for our plan is 10 / 14 =

71.4% and we truncate this down to the nearest whole

number giving 71% (then we would go to our chart –OR)

• The safe harbor percentage is the lesser of 50% and

[50% minus 75% of the concentration percentage

reduced by 60%]

Minimum of 50% and [50%-(71%-60%)x75%] = 41.75%

• The unsafe harbor percentage is 40% if the concentration

percentage is under 61%; but if over, it is the larger of

20% and {20% + [50% x larger of (0% and 87% -

concentration percentage)] + [25% x larger of (0% and

86% - concentration percentage)]}

50


Nondiscriminatory classification test

• Since the concentration percentage is over 61% we need

to do the ugly calculation

• Larger of 20% and [20% + 50% x (larger of 0% and 87% - 71%) +

25% x (larger of 0% and 86% - 71%)]

Larger of 20% and [20% + 50%x(16%) + 25%x(15%)] = 31.75%

• So now we take the mid-point of the safe and unsafe

harbors to get (41.75% + 31.75%)/2 = 36.75% to test

against the ratio percentage for each rate group that

didn’t already pass 410(b) using the ratio percentage test

on the EBARs

• Since the ratio percentage for the rate group that didn’t

pass is higher than 36.75% we go to part 2

51


Average benefit percentage test

• Like the ratio percentage test for 410(b) this is another

70% test where the average benefit percentages for the

NHCEs divided by the average benefit percentages for

the HCEs must be greater than or equal to 70%

• The difference however is that we are averaging the

“total” EBAR for all NHCEs and HCEs, so we have a

single test rather than one for each rate

• So we start by determining the “total” EBARs for each

employee where we include the profit share, safe harbor

and deferral amounts (no catch-ups) for each participant

52


total EBARs HCE total EBARs NHCE total EBARs

Robert 5.12% 5.12% 0.00

Beverly 5.12% 5.12% 0.00

Jim 32.97% 32.97% 0.00

Sara 9.65% 9.65% 0.00

Eve 2.73% 0.00 2.73%

Clara 19.92% 0.00 19.92%

James 1.21% 0.00 1.21%

Terry 13.14% 0.00 13.14%

Carrie 7.22% 0.00 7.22%

Sally 6.72% 0.00 6.72%

Steve 9.91% 0.00 9.91%

Kia 10.10% 0.00 10.10%

Alex 16.48% 0.00 16.48%

Mary 5.26% 0.00 5.26%

totals 52.86% 92.69%

averages 13.22% 9.27%

average benefit percentage ratio 70.12%

53


So now we see that we pass the 401(a)(4) testing for this

allocation with the owners at $250,000 of compensation, but

what ACTUALLY happens to our eligible compensation

given this allocation?

54


Initial K1 or partner share adjusted pre-tax/Roth safe harbor eligible plan

W2 Income of staff costs SE income ½ SE tax deferrals catch-up match profit share comp.

Robert

298,800.00 8,907.92 289,892.08 11,228.87 18,000.00 6,000.00 10,000.00 25,000.00 243,663.21

Beverly

298,800.00 8,907.92 289,892.08 11,228.87 18,000.00 6,000.00 10,000.00 25,000.00 243,663.21

Jim

70,000.00 7,000.00 - 2,800.00 2,625.00 70,000.00

Sara

25,000.00 - - - 937.50 25,000.00

Eve

48,000.00 4,000.00 - 1,920.00 1,600.00 48,000.00

Clara

55,000.00 3,500.00 - 2,200.00 1,833.33 55,000.00

James

41,000.00 - - - 1,366.67 41,000.00

Terry

10,000.00 1,200.00 - 400.00 - 10,000.00

Carrie

66,000.00 1,800.00 - 1,800.00 2,200.00 66,000.00

Sally

42,000.00 - - - 1,400.00 42,000.00

Steve

40,000.00 400.00 - 400.00 1,333.33 40,000.00

Kia

8,000.00 - - - 266.67 8,000.00

Alex

30,000.00 - - - 1,000.00 30,000.00

Mary

55,000.00 - - - 1,833.33 55,000.00

1,087,600.00 17,815.84 579,784.16 22,457.74 53,900.00 12,000.00 29,520.00 66,395.83 977,326.42

55


Since we now have lower eligible pay than $250,000 for the

owners, several things will change

• We will have a different safe harbor match amount

• We will have a higher profit share amount to maximize

owners at the 415 limit

• We will have higher staff contributions to satisfy the

gateway requirements

• Higher staff contributions will reduce the “adjusted pay”

and the ½ SE tax calculations

• All of these changes impact our EBAR and total EBAR

calculations for everyone

• So we reiterate our contribution and pay calculations

56


partner share of adjusted pre-tax/Roth safe harbor eligible plan

addt’l staff costs SE income ½ SE tax deferrals catch-up match profit share comp.

Robert 9,141.54 289,658.46 11,225.74 18,000.00 6,000.00 9,746.53 25,253.47 243,432.72

Beverly 9,141.54 289,658.46 11,225.74 18,000.00 6,000.00 9,746.53 25,253.47 243,432.72

Jim 7,000.00 - 2,800.00 2,625.00 70,000.00

Sara - - - 937.50 25,000.00

Eve 4,000.00 - 1,920.00 1,658.25 48,000.00

Clara 3,500.00 - 2,200.00 1,900.08 55,000.00

James - - - 1,416.43 41,000.00

Terry 1,200.00 - 400.00 - 10,000.00

Carrie 1,800.00 - 1,800.00 2,280.10 66,000.00

Sally - - - 1,450.97 42,000.00

Steve 400.00 - 400.00 1,381.88 40,000.00

Kia - - - 276.38 8,000.00

Alex - - - 1,036.41 30,000.00

Mary - - - 1,900.08 55,000.00

18,283.08 579,316.92 22,451.48 53,900.00 12,000.00 29,013.06 67,370.02 976,865.44

57




Robert 9,150.27 289,649.73 11,225.63 18,000.00 6,000.00 9,737.31 25,262.69 243,424.10

Beverly 9,150.27 289,649.73 11,225.63 18,000.00 6,000.00 9,737.31 25,262.69 243,424.10

Jim 7,000.00 - 2,800.00 2,625.00 70,000.00

Sara - - - 937.50 25,000.00

Eve 4,000.00 - 1,920.00 1,660.43 48,000.00

Clara 3,500.00 - 2,200.00 1,902.58 55,000.00

James - - - 1,418.28 41,000.00

Terry 1,200.00 - 400.00 - 10,000.00

Carrie 1,800.00 - 1,800.00 2,283.09 66,000.00

Sally - - - 1,452.88 42,000.00

Steve 400.00 - 400.00 1,383.69 40,000.00

Kia - - - 276.74 8,000.00

Alex - - - 1,037.77 30,000.00

Mary - - - 1,902.58 55,000.00

18,300.54 579,299.46 22,451.26 53,900.00 12,000.00 28,994.62 67,405.92 976,848.20

58


And so on and so on until….

59




Robert 9,150.60 289,649.40 11,225.62 18,000.00 6,000.00 9,736.95 25,263.05 243,423.78

Beverly 9,150.60 289,649.40 11,225.62 18,000.00 6,000.00 9,736.95 25,263.05 243,423.78

Jim 7,000.00 - 2,800.00 2,625.00 70,000.00

Sara - - - 937.50 25,000.00

Eve 4,000.00 - 1,920.00 1,660.51 48,000.00

Clara 3,500.00 - 2,200.00 1,902.67 55,000.00

James - - - 1,418.36 41,000.00

Terry 1,200.00 - 400.00 0.00 10,000.00

Carrie 1,800.00 - 1,800.00 2,283.21 66,000.00

Sally - - - 1,452.95 42,000.00

Steve 400.00 - 400.00 1,383.76 40,000.00

Kia - - - 276.75 8,000.00

Alex - - - 1,037.82 30,000.00

Mary - - - 1,902.67 55,000.00

18,301.20 579,298.80 22,451.24 53,900.00 12,000.00 28,993.90 67,407.30 976,847.56

60


We can double check that our final contributions and

eligible pay are correct:

$243,423.78 final eligible compensation

+ 35,000.00 total safe harbor match and profit share

+ 11,225.62 ½ SE tax after final staff contributions

+ 9,150.60 50% of the additional funding for staff

$298,800.00

Yea! We are done - until they tell us they want to do

something different.

61

Last Step Review The Design

62

Review The Design

After year one, how does the client like their plan design?

• Liked the fact they were able to max themselves

• Didn’t like the fact that they spent nearly 7.5% on some

employees and only about 3.5% on others

• Though they liked the idea of requiring a deferral to share in the

safe harbor match, they didn’t realize the disparity in benefits

between staff until it actually happened

• Wished they could save some more on the cost of the

plan

So what would it have looked like had they gone with the 3% non-

elective safe harbor?

63

Review The Design


addt’l staff costs SE income ½ SE tax deferrals catch-up 3% profit share comp.

Robert 8,676.88 291,323.12 11,248.04 18,000.00 6,000.00 7,352.25 27,647.75 245,075.08

Beverly 8,676.88 291,323.12 11,248.04 18,000.00 6,000.00 7,352.25 27,647.75 245,075.08

Jim 7,000.00 - 2,100.00 2,800.00 70,000.00

Sara - - 750.00 1,000.00 25,000.00

Eve 4,000.00 - 1,440.00 845.01 48,000.00

Clara 3,500.00 - 1,650.00 968.25 55,000.00

James - - 1,230.00 721.78 41,000.00

Terry 1,200.00 - 300.00 176.04 10,000.00

Carrie 1,800.00 - 1,980.00 1,161.89 66,000.00

Sally - - 1,260.00 739.39 42,000.00

Steve 400.00 - 1,200.00 704.18 40,000.00

Kia - - 240.00 140.84 8,000.00

Alex - - 900.00 528.13 30,000.00

Mary - - 1,650.00 968.25 55,000.00

17,353.76 582,646.24 22,496.08 53,900.00 12,000.00 29,404.50 66,049.26 980,150.16

64

Review The Design

• Safe harbor non-elective combined with profit share

spends a flat 4.76% of pay ($25,453.76) on eligible staff

in order to maximize owners

• The safe harbor match and profit share we actually used

in the 1st year spent a total of $26,401.20 to max owners

• The safe harbor non-elective contribution is easy to

budget for vs. safe harbor match because the quantity is

always 3% of pay, and it is likely that no more than 2%

will ever be needed as additional profit share for staff

either (as long as the owners have high comp)

• Remember to point out that there would be required

contributions now for terminees with the 3% safe harbor

65

Review The Design

They decide to convert to safe harbor non-elective!

66

Questions?

67

The following sessions still remain in the life of our plan:

Acquisition Corrections

Cash Balance Termination

THANK YOU!

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