“However the organization is growing, and, given the most recent raise for the executive director, she is expected to exceed (barely) the HCE compensation threshold for 2015. Is there a transitional period to pass testing? The plan utilizes a non-safe harbor match that would likely fail ACP testing, I suspect that they would be reluctant to change a plan design that they have enjoyed for many years, for financial and other reasons.”
Michael A. Webb, vice president, Cammack Retirement Group, answers:
Excellent question, and it is great that you have been keeping track of this issue for them. First of all, there is no transitional period; unfortunately, the plan becomes subject to all nondiscrimination testing, including 410(b) coverage and 401(a)(4) general nondiscrimination testing (including the Average Contribution Percentage, or ACP testing, that you cite) in the first year when HCEs are present.
However, the HCE determination is always made based on prior year compensation. Thus, if your executive director earns more than the HCE threshold in 2015 ($120,000) but not in 2014 ($115,000), then the first year for which nondiscrimination testing applies is 2016. Also, if she “barely” exceeded the threshold in 2015, she may not in future years due to indexing. Thus, her compensation will need to be monitored in future years, as it is possible she will not be an HCE in a future year(s), which would mean that the plan may not be subject to nondiscrimination testing for the year(s) in question.
We assume that your statement that the plan “would likely fail ACP” is based on the fact that the executive director participates fully in the matching portion or the plan, and that your voluntary participation rate among the remaining employees is low. However, you should perform a “mock” test for 2015, as if she was already considered to be an HCE, just to confirm. Assuming that the “mocK’ test is failed, you have several options:
1) Attempt to increase voluntary participation in the plan so that it is sufficient to pass testing:. This is often a difficult task due to employee inertia, but not insurmountable in smaller nonprofits where it is often easier to contact employees, especially if they are all in one location.
2) Discuss the situation with the executive director and inquire as to whether she would be willing to be excluded from the plan for matching contribution purposes. She may be agreeable to such a solution if she knows the alternative is a redesign of the plan which may cost the institution a significant amount of money, especially if a) the match is modest and/or b) she has already accumulated sufficient retirement savings.
3) Alternatively, work with the executive director to devise a scenario where she will NOT reach the HCE compensation threshold in 2015. This would require a modest reduction to her compensation package, but again, this may be preferable to a plan redesign.
4) Consider adding a 457(b) plan for the executive director. Though not quite as flexible as a 403(b) plan, employer contributions for her could be made to this plan up to an indexed limit—the same limit as that of elective deferrals to a 403(b) plan ($18,000 in 2015) without any nondiscrimination testing requirement. Of course, there would be administration involved in establishing and maintaining such a plan.
If none of the solutions above are workable, and assuming a costly plan redesign (enhancing the match to satisfy the ACP safe harbor, or converting the match to a base/discretionary contribution) is not practical, you will need to proceed with the 2016 nondiscrimination testing for the plan, with appropriate corrections for test failure.
Thank you for your question!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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