In designing a cross-tested plan or “rescuing” such a plan from nondiscrimination failure, one of the more overlooked “correction” tools is restructuring. Restructuring permits the practitioner to divide the plan into two or more component plans that can be tested separately for nondiscrimination. For example, the practitioner might restructure the plan so that younger highly compensated employees (HCEs) and older nonhighly compensated employees (NHCEs) are in a component plan while the older HCEs are in another component plan with the younger NHCEs. A practitioner might also add flexible family members (family members around whom the employer is not designing the plan) to the plan and then restructure the plan into component plans that facilitates passing nondiscrimination. With the use of restructuring, practitioners may be able to establish cross-tested plans for employer where such designs were thought not to work. The practitioner also may be able to use restructuring to reduce the employer contribution costs for a cross-tested plan. In this Part II, we will discuss the rules for using restructuring and provide some illustrations on how the technique works. Part I may be viewed here.

If a plan is restructured into component plans, may each component plan be tested on a different basis (e.g., one component tested on a benefits basis [cross-tested] and the other component tested on an allocation basis)?

Yes. In fact, such a method often is useful in assisting a cross-tested plan with younger HCEs or older NHCEs in satisfying nondiscrimination.

Example. Corporation X (medical practice) has been maintaining an integrated profit sharing plan to which he contributed 5% of total compensation plus 5% above the integration level. Dr. A would like to increase his allocations to 415 limit ($51,000) without increasing his allocations for his staff. Previously, his TPA advised him that a cross-tested plan would not work because of his two older employees. The initial plan design proposal is as follows:

The midpoint % for the nondiscrimination test = 30% fails (25%)

Average benefit percentage – needs 70% fails (47.37%)

A new consultant proposes to pay the spouse ($25,000) for the bookkeeping work she already is performing and add her to the plan (eligibility conditions may need to be amended). Because her husband owns the practice, the spouse will be a highly compensated employee. The consultant proposes to amend into a cross-tested plan with an allocation formula that places each participant in his/her own classification. The consultant will restructure the plan for nondiscrimination testing into two components (each with one HCE and two NHCEs) as follows: 

Component 1 

The midpoint % for the nondiscrimination test = 40.5% passes (50%)

Average benefit percentage – needs 70% passes (82.64%)

Component 2

5% Uniform allocation - passes

Note that each component satisfies coverage (1/2 HCEs – 50%/2/4 NHCEs – 50% = 100%) so the component plans may be tested separately for nondiscrimination. 

If one component satisfies nondiscrimination on a benefits basis (cross-tested) and another component satisfied nondiscrimination on an allocation basis, may the plan limit the minimum gateway requirements to the cross-tested component? 

No. The minimum gateway requirements will apply to the plan as a whole. 

May an employer restructure a plan into two or more components to facilitate qualifying as a uniform allocation safe harbor plan for nondiscrimination purposes? 

Yes.

May a plan use restructuring for purposes of the minimum participation requirements (DB plans)? 

No. Restructuring only applies for purpose of the nondiscrimination requirements. 

We will further discuss this topic at our Advanced Cross-Tested Plans Workshop, presented in 12 cities in September and October. We also will discuss component plans in our Advanced Pension Conference in Chicago, August 28-30. See details below. 

******************************************************************** 

Upcoming Web Seminars
ERISA Recapture Accounts: Understanding How ERISA Applies, August 14, 2:00 p.m. ET
457(b) Plans for 401(k) Practitioners, August 15, 2:00 p.m. ET
Safe Harbor 401(k) Plans 2013 - 3 parts, August 20-21-22, 12:00 p.m. ET
Fundamentals of 401(k) Plans - 7-part Web seminar series, September. Registration opens soon.
For program details about upcoming Web seminars, and to register online: http://www.relius.net/events/events.aspx?Web 

Chicago Advanced Pension Conference – August 28-30
New this year – 75% more breakout sessions and topics; deeper registration discounts; experience Chicago on us - free Navy Pier’s Ferris wheel ride and Food Court voucher. Topics on the agenda include: tax reform, EPCRS 2013, pre-approved 403(b) plans, E&O coverage, component plan testing, 457 plans, disqualification, ERISA recapture accounts, early eligibility, TPA contracts, and more. Earn up to 19 hours of CE credits. See complete program details and register online on our Web site: http://www.relius.net/Events/seminardetail.aspx?CID=26172

Just for ERPAs Workshop – Chicago, August 27 – Discount for APC attendees
Scheduled on Tuesday, August 27, the day before the APC, this workshop covers prohibited transactions, details on 5330, what we are seeing in DOL and IRS audits, doctor plans, ethics, and more. Earn up to 8 hours of ERPA credit, including 2 ethics hours. Register for both the Chicago APC and the ERPA Workshop, and pay only $250 for the Workshop, a savings of $160. See details and register online on our Web site: www.relius.net/Events/seminardetail.aspx?EID=26300

Advanced Cross-Tested Plans: Adding More Tools – 12 cities, September - October
Restructuring, Age/Service Schedules, Banding, Family Members, and More
Cross-tested profit-sharing and 401(k) plans are among the most popular plan designs today. They can aid a practitioner in tailoring a plan for the needs of a business and its workforce. But cross-testing is not a “one size fits all” design. There are many approaches to a cross-tested plan, with very different outcomes. And unless a practitioner understands all the tools available for the plan, the practitioner may well provide a plan that is less effective or more costly than it could or should be. SunGard’s new Advanced Cross-Tested Plans Workshop adds to the tools practitioners have available to assist their clients. Now open for online registration. See program details here: www.relius.net/events/events.aspx?Seminar

401(k) Plans: Beyond the Basics – 6 Cities, September - October 
This practical, intermediate course will help enhance your 401(k) knowledge and update you on the most recent 401(k) plan guidance. Incorporating recent law changes, the program extends beyond the basics to cover special 401(k) testing rules and design options. Over the two days, we consider many issues and problem areas for which experienced 401(k) practitioners need to be prepared. Earn up to 13 hours of CE credits. Open for registration now. See details and register here: www.relius.net/events/events.aspx?Seminar