Expert: Allen - 8/6/2005

Question
Hello Allen,

I have a small dental office in Michigan. Some years ago I enrolled in a Coda Sep(like a sar sep, but not identical)for myself and my 5 employees. Its low expense to maintain and 3 % match were simple to operate. When we had tax law and 401 k changes some years ago it has become a hassle to explain the coda system to accountants that are 401 k oriented.

Also, over the years participation by the employees has waned. Therefore,for me to put away 42,000 a year I am required to overfund the empoyee end of the plan. So the cost of the plan is high due to lack of participation and that each accountant or plan evaluator has a different formula to arrive at the match, the adp test .



My question: in COda seps what is the definitive answer regarding calculation of maximum contribution using Adp test&top heavy testing etc?

Please respond with an example and an equation if possible.


Thank you

Greg Grady


Answer
I believe I am very familiar with the various types of plans. But I have not heard of a coda sep. I have heard and do some work with sarseps (which are grandfathered if they were adopted before 1997 or 1998- can't remember which one off the top of my head) and simple plans which replaced sarseps but which don't allow for contributions of $42000. Do you possibly have a coda profit sharing plan which is subject to adp/acp testing and which requires annual filings with the government? Additional details would help.
In any event, if you have at least 2 young employees you may be able to establish what is known as a cross tested safe harbor 401k plan which will allow you to contribute up to $42,000 per year ($46,000 if you were born beore 1956) with an employee cost of 5% of eligible payroll. We can help you with this type of plan or can give you the names of someone in your area who can help you.