Can a defined benefit plan covering only HCEs provide different benefits to those HCEs? I have a new client who hired sales manager 5/8/00. My client,the 100% owner, was told by his prior actuary that the sales mgr. did not have to be covered,and in fact had him execute a waiver of participation.Since the owner and the mgr. are the only employees this violates 401(a)(26).If the plan could be restructured to provide a lower benefit for the sales mgr.this might make the situation more palatable.Any thoughts?Thank you.

Not sure if I understand your facts.

The issue of discrimination within a qualified plan is concerned only with comparison between NHCEs and HCEs. The plan can discriminate between HCEs or between NHCEs. Of course, this might lead to other HR problems, but it is not prohibited by the Internal Revenue Code.

You have it exactly right. The business owner would like to provide no benefit to his sales manager,but is prevented from doing so by 401(a)(26).It would seem that the plan could be written to provide two different benefit levels for the two HCE's,analogous to a tiered dc allocation. The only thing that gives me pause is that (a)(26) is based on headcount only,and does not differentiate between HCEs and NHCEs.

I would be concerned about the validity of the Waiver of Participation, particularly because the sales manager was not a HCE when (s)he signed that.

On my Soapbox: it is situations like this one that have led us to the stunning amount of rules and regulations that we have for qualified plans. This comment is strictly mine, and does not represent the position of my employer, any former employer, or anyone else for that matter. And certainly not meant as a criticism of sdolce.

RCK