Acme Company Profit Sharing Plan Analysis

Analysis of Acme Company's Profit Sharing Plan

The Acme Company has a noncontributory qualified profit-sharing plan with a total of 310 employees, 180 of whom are nonexcludable (40 highly compensated and 140 non highly compensated). The plan covers 72 non highly compensated employees (NHC) and 29 highly compensated employees (HC). The NHC receive an average of 4.5% benefit, while the HC receive 6.5% benefit.

Which of the following statements is (are) correct?

1. The Acme Company plan meets the ratio percentage test.

2. The Acme Company plan fails the average benefits test.

3. The plan must and does meet the ADP test.

Which of the following statements is (are) correct?

The answer is (c) both 1 and 2. The Acme Company Plan meets the ratio percentage test since the plan covers 72 non highly compensated employees (NHCE) out of the 180 non-excludable NHCE, which is 40% of the total employees covered by the plan. The Acme Company Plan also fails the average benefit test, since the NHCE average benefit of 4.5% is lower than the 6.5% of the highly compensated employees (HCE). Therefore, both 1 and 2 are correct.