Advanced Plan Design: Safe Harbor NCP Plans and Creative Solutions

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

2. Advanced Plan Design • Safe Harbor NCP Plans • Unique problems=Creative Plan design • Plan Design using Coverage Rules • DB/DC Combo plans

3. Safe Harbor • ABC company has a calendar year 401(k) plan. They want to adopt a safe harbor plan on July 1. • Can they do this? • Would the answer change if they only had a PS plan?

4. Safe Harbor • ABC company has a calendar year 401(k) plan. They want to adopt a safe harbor plan on July 1. • Can they do this? • A. No, plan year must be 12 months & 30 day notice must be given prior start of plan year. • Would the answer change if they only had a PS plan? • A. Yes

5. Safe Harbor • ABC company Does Not have any plan. They want to adopt a safe harbor plan on Oct.1 • Can they do this?

6. Safe Harbor • ABC company Does Not have any plan. They want to adopt a safe harbor plan on Oct.1 • Can they do this? • A. Yes, 30 day notice must be given & first plan year must be at least 3 months for new plan

7. Safe Harbor • ABC Company wants to gets its Key Employees to $40,000, however NCP Doesn’t work. • Can they design a Safe Harbor plan that would accomplish this goal?

8. Safe Harbor 401(k) Plan • Employee Comp Deferrals S/H Match • A $200,000 $11,000 $8,000 • B $200,000 $11,000 $8,000 • C $38,800 $1,200 $1,182 • D $34,000 $1,000 $1,000 • E $28,000 $0 $0 • F $20,000 $0 $0 • NCP Doesn’t work • No PS Provision • How do you get the HCE’s $40,000?

9. Safe Harbor 401(k) Plan • Employee Comp Deferrals S/H Match Fixed Match • A $200,000 $11,000 $8,000 $13,000 • B $200,000 $11,000 $8,000 $13,000 • C $38,800 $1,200 $1,182 $1416 • D $34,000 $1,000 $1,000 $1180 • E $28,000 $0 $0 $0 • F $20,000 $0 $0 $0 • Fixed Match = 118% of elective deferrals not to exceed 5.5% of Comp.

10. Safe Harbor 401(k) Plan • Employee Comp Deferrals S/H Match F/ M D/M Total • A $200,000 $11,000 $8,000 $13,000 $8,000 $40,000 • B $200,000 $11,000 $8,000 $13,000 $8,000 $40,000 • C $38,800 $1,200 $1,182 $1416 $873 $4,671 • D $34,000 $1,000 $1,000 $1180 $727 $3,907 • E $28,000 $0 $0 $0 0 $0 • F $20,000 $0 $0 $0 0 $0 Total $88,578 • Fixed Match = 118% of elective deferrals not to exceed 5.5% of Comp • Disc. Match = 4%

11. NCP Plans • ABC Company has a standardized plan document requiring 500 hrs for a PS allocation. • When do they need to amend for NCP? • What if they had a 1000hr requirement? • What if they had a last day requirement?

12. NCP Plans • ABC Company has a standardized plan document requiring 500 hrs for a PS allocation. • When do they need to amend for NCP? • Before any participant accrues 500hr’s of service • What if they had a 1000hr requirement? • Before any participant accrues 1000hr’s of service • What if they had a last day requirement? • Before end of the year.

13. Safe Harbor with NCP “How Does it Work?” • Use 3% non-elective Safe Harbor • No ADP testing • No ACP if matching meets IRS criteria • HCEs can get $40,000 under 401(k) and NCP combo • Same 3% can be used for top-heavy and NCP tests • 401(k) helps pass NCP tests • 100% vesting and employee notice required on safe harbor

14. Safe Harbor with NCP NCP with Non-Elective Safe Harbor For Plan Year Ending December 31, 2002 Total Covered Income: $965,000 Total Profit Sharing: $36,000 Total 401(k) Deferral: $ 54,950 Total 401(k) Match: $ 0 Total Safe Harbor: $ 28,950

15. Unique Problems = Creative Solutions

16. The Hiring Problem • ABC Salon is having trouble attracting Hair Dressers because of Multiple employment opportunities available to them. • ABC Salon is looking for an alternative compensation package that would help attract these employees. • Can ABC’s Profit sharing plan be used to help with this problem?

17. Signing Bonuses Hiring Problem Solution • Identify a class of ee’s • Use NCP Class Testing • Vesting Schedule applies • HCEs must be excluded

18. Unique Problems= Creative Solutions • ABC Company wants to establish a matching contribution for several classes of employees & a profit sharing contribution for another set of employees. • Assuming that no HCE’s are eligible for the plan, can they do this?

19. Unique Problems= Creative Solutions • ABC Company wants to establish a matching contribution for several classes of employees & a profit sharing contribution for another set of employees. • Assuming that no HCE’s are eligible for the plan, can they do this? • A. Yes, because there are no HCE’seligible

20. Plan Design Using Coverage Rules

21. 410(b) Coverage Rules • Z Company is a controlled group with two other companies • Z Corp has 120 ee’s (100 NHC’s) • Y Corp has 100 ee’s (85 NHC’s) • P corp has 20 ee’s (15 NHC’s) • Q. Z & Y want to establish a plan, but they don’t want cover P. Can they do this?

22. 410(b) Coverage Rules • Yes, The plan must cover 70% of the NHC ee’s. As long as they do this between Z & Y - they will pass. If not they will have to cover P.

23. 410(b) Coverage Rules • ABC Company & XYZ are a controlled Group. They would like to maintain separate plans with separate benefits. • ABC has 9 NHC & 3 HC’s and XYZ has 18 NHC & 6 HC’s. • Q. Can this be done?

24. 410(b) coverage Rules • A. Yes, subject to 410(b) testing • Each plan must cover 70% of NHC’s • ABC • 3/9=33% * 70% = 23% * 27=6<9=Pass • XYZ • 6/9=66%* 70% = 46% * 27=12<18=Pass • Plans must be tested annually

25. 410(b) Coverage Rules • ABC company is a controlled group that would like to add a single profit-sharing plan, however they would like to have the ability to have different profit-sharing allocations for each company. • Can they do this?

26. 410(b) Coverage Rules • Yes, document must specify • The plan must pass 410(b) testing (70% ratio). If all of the companies make a contribution, this won’t be an issue. • Must pass 401a(4) testing (Cross Testing)

27. Defined Benefit/Defined Contribution • 404(n) removes ee deferrals from ER contribution. Definition for deductible limits • Max deductible contribution is greater of 25% or minimum required DB contribution

28. Defined Benefit/Defined Contribution • Bob (52) earns $200K & Mary (55) earns $40,000. • If they set-up a PS/K plan. They can contribute: • $60,000 PS • $20,000 EE deferrals • $4,000 Catch up • Total: $84,000

29. Defined Benefit/Defined Contribution • Bob (52) earns $200K & Mary (55) earns $40,000. • If they set-up a DB/K plan. They can contribute: • $124,828 DB Funding • $24,000 EE deferrals • $4,000 Catch up • Total: $152,828

30. Defined Benefit/Defined Contribution • Separate DB/DC plans for same employer: • Older HCE’s take advantage of DB • Younger HCE’s take advantage of DC

31. Defined Benefit/Defined Contribution Plans • May meet the needs of the HCE’s, however, the NHCE’s may not be so thrilled with participating in a DB plan • 404(a) 7 deduction limits do not apply because no single EE covered by both plans

32. Defined Benefit/Defined Contribution Plans • Employee DC DB • HCE#1 $0 $163,169 • HCE#2 $0 $148,693 • HCE#3 $40,000 • HCE#4 $40,000 • NHCE#1 $9,960 • NHCE#2 $9,960 • NHCE#3 $2,299 • NHCE#4 $2,616 Totals: $99,920 $316,776