HCE Options for 401K

[Crispix]

What is the name of your state? California.

I own a small business (S Corp): 2 partners and 5 employees. We have a 401k plan and do not match employee contributions. The partners have a modestly low salary and we distribute profits at the end of the year. As a result, we are failing the 401k non-discrimination tests since my 401k contributions take up too large a percentage of HCE salary as compared to non-HCE's, even though HCEs make less than most non-HCEs.

Besides offering matching to employees to qualify for safe-harbor, is there anything else I can do to contribute more to my 401k? Do the calculations have to be based on my salary, or can they be based on my salary + profit distributions? (If the latter is possible, it will allow for larger contributions.) What other options would I have without having to match? IRA? A better/different 401k plan? I talked to my 401k advisor and he couldn't offer any suggestions. Thanks for the advice!

 

[Beth3]

I suggest you speak to another investment advisor and perhaps someone with one of the "big" benefit consulting houses - Baird, Hewitt, Towers-Perin, etc., or the Trust Division of a major financial institution in your area. This is a very complex area of benefits and benefits regulations and you really need to speak to someone expert in this. The answer to your situation may not be to change your 401(k) Plan - given your small size, there simply may be no way around the discrimination issues - but rather to offer a non-qualified deferred compensation plan to the HCE's. There are a number of options how you might want to do this AND a number of pro's and con's you should be well informed of before venturing down this path.

You need considerably more expert advice than anyone can give you on a public bulletin board. You might want to check with some of your business contacts and see if they can give you a referral to whomever they use. Do speak with several different consulting houses or investment advisors before deciding what you want to do.

 

[TWool]

SH 401k...

For a company of your size, that is a common problem. You as the HCE want to defer the max under 402g but by doing this you fail the ADP test because the NHCEs just are not putting in a large enough % of their compensation.

Before you go and spend $ asking the big consulting firms their advice ( I am a small TPA in Boston who handles plans like yours ) consider what a SH plan would cost you in the way of SH contrinutions. There are 2 kinds of SH contributions which will provide an automatic "Pass" when performing the ADP test.

SH MATCH: you agree as the employer to match your NHCEs deferrals dollar for dollar on the first 3% that they defer and an additional 50 cents on the dollar on the next 2 %.

SH NEC: you agree to provide a straight 3% employer contribution to each employee... if they defer or not. The SH NEC is for all EEs... HCE or NHCE.

Which is better? well, you need to look at the deferral history to make an educated decision. If the average NHCE is deferring 6% or more then the SH NEC is cheaper for you as the employer. If the average is below 6% then the SH MATCH might be better. Remember, you need to provide an annual SH notice to each employee informing them what kind of SH contribution you are using. EEs might decide to contribute more if they know that the employer is going to match their deferrals.

Compensation.... your plan document will have language in it that will define what is compensation. No high powered consulting firm can wave their magic wand and make it all better. Pension law and ERISA is black and white.

Good luck!

 

[Crispix]

Thank you both for the detailed reply. I looked up the plan documents and the "compensation" definition is indeed black and white: W2. The question is now whether I can change to "415 safe-harbor compensation" and also whether or not making such a change is helpful in my situation. I'm calling my 401k company to ask, and thanks again for the advice.