Here are a few tips to help you understand Class designations in the Retirement Planning Center. To begin, The Classes screen is only used with Profit Sharing Plans when “New Comparability” is selected in Plan Specifications. Classes are not applicable when Age-Weighted, Integrated, or Non-Integrated plan types are selected.
By default, three classes are automatically created for you:
- Class A (Owners): This class is defaulted to: “Maximize Class to Section 415 Limit” (this will usually result in $49,000 allocation for each owner). However note that when you use the “Quick Plan Comparison” in creating your plan, the default is “Maximize Highest Paid Member of Class”. It takes the Highest Paid Participant’s allocation percentage, based on the maximum contribution ($49,000 less deferral and safe harbor contribution), and applies it to everyone in the group.
- Class B (Non-owners): The Non-owner NHCE Class will default to “Minimize Class to pass 401(a)(4)”.
- Class C (Non-owner HCE’s): The Non-owner HCEs will default to the a fixed contribution equal to 5% of compensation.
Note: This is not necessarily the combination that will make the Plan pass the non-discrimination test. Be sure to look at the “Non-Discrimination Test Results”. See “Minimize class to pass 401(a)(4)” below.
You can change the default description (e.g. “Owner”) and the default contribution. You may even choose not to use any of the defaults. In addition, you can add as many classes as you need. You can have a Class for each participant, if you would like. However, you can only maximize one class. Similarly, you can only minimize one class.
Assigning Participants to each Class
In order to assign participants to a class, go to the Census screen and associate each participant using the letters assigned by the system. You can also enter classes in the census template prior to uploading.
Profit Sharing Allocations by Class
1. Maximize Class to 415 Limit – All employees in this class will receive an allocation equal to their Section 415 maximum limit reduced by their 401(k) deferrals and any other employer contributions (usually safe harbor contributions). This means that everyone in this class will get a total contribution of $49,000 regardless of their salaries. If one of the Owners in this class were only making $50,000 and his total contribution is $49,000, this is a sure way to fail the Non-Discrimination test. Try using the next option – Maximize Highest Paid Member of Class. Click here to display the current Annual Dollar limits.
2. Maximize Highest Paid Member of Class – The highest paid employee in the class will receive an allocation equal to their Section 415 maximum limit reduced by their 401(k) deferrals and matching contributions, if any. All other employees in the class will receive an allocation equal to a fixed percentage of their W2-Earnings. The fixed percentage is equal to the allocation provided to the highest paid employee in the class as a percentage of his W2-Earnings.
3. Minimize Class to Pass 401(a)(4) – All employees in this class will receive an allocation calculated to be the smallest amount necessary to pass the Section 401(a)(4) Non-discrimination Test. However, this will never be less than the gateway minimum required for cross-testing profit sharing plans (the lesser of 1/3 of the highest profit sharing allocation of all HCEs or 5%). Note that the 3% Safe Harbor nay be used towards the gateway.
4. Fixed Contribution Per Individual – All employees in this class will receive an allocation equal to a fixed percentage of their W2- Earnings for the current year, or a fixed dollar amount.