Module 2.docx

A cross tested plan also has a 5 gateway which means

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A cross-tested plan also has a 5% gateway, which means that at least 5% must be contributed for all non- highly compensated employees. In general, cross-testing is a good and legal way to skew contributions in favor of older employees, but it does come with higher administrative costs. Cross-testing should just be understood conceptually. Age-Weighting A much more complicated cousin to cross-testing is called age-weighting . In an age-weighted plan, the benefits must be structured so that everyone receives the same rate of benefit accruals. You will not need to calculate an age-weighted benefit on your own, but you will be required to understand how this works conceptually. It will be easiest to explain the concept of age-weighting with an example. Consider a plan with three participants. Jen, age 50, earns \$150,000. John, age 35, earns \$30,000. Stephanie, age 28, also earns \$30,000. Jen is the business owner and she wants to contribute \$75,000 to an age-weighted plan in 2016. The first step is to convert all three employees to the same rate of benefit accruals. We will use a rate of 1% of each employee's monthly pay. So, Jen’s 1% benefit accrual equals \$125 ([\$150,000/12 months] x 1%). Since both John and Stephanie have the same gross compensation, they will both have the same 1% benefit accrual of \$25 ([\$30,000/12 months] x 1%). The second step is for an actuary to use a government mortality table to find the current contribution equal to \$1 of benefit. Since you will not need to calculate this yourself, the table value of \$95.38 will be a given. We then apply this table’s value to each person’s benefit accrual to determine their future dollar need. Jen will need \$11,922 (\$95.38 x \$125), and both John and Stephanie will each need \$2,384 (\$95.38 x \$25). If we assume that plan assets will grow near the historical average of 8.5%, then we can calculate the current dollar amount required to provide the needed future dollar amount. Susan will need \$3,506 of current contribution to yield \$11,922 at 8.5% interest over 15 years (her time until retirement). This is a simple time value of money application. John will need \$206 of current contribution to yield \$2,384 at 8.5% after his 30 years expected remaining working life. Stephanie will only need \$117 of current contribution because she has 37 years until reaching the normal retirement age of 65. Now, we will calculate each participant’s age-weighted required percentage allocation of the planned \$75,000 total contribution. Jen should receive 91.57% of the contribution because her current contribution needed of \$3,506 is 91.57% of the total \$3,829 (\$3,506 + \$206 + \$117) required. John should receive 5.39%, while Stephanie should receive 3.04%. One caveat with this process (there are

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always caveats!) is that NHCEs must receive at least a 5% allocation. So, we would adjust Jen’s percentage down to 89.61% and Stephanie’s percentage up to 5.0%. Jen will receive a dollar contribution of \$67,207.50 (\$75,000 x 89.61%), while John will receive \$4,042.50 and Stephanie receives \$3,750.00.
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• Spring '14
• VOSS,JAMESA
• Cash balance plan, HCES

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