Who gets a 5% contribution?

[Belgarath]

Hi Mike - are you sure about this? The regs are a bit confusing. 1.401(a)(4)-2©(2) provides that only employer contributions and forfeitures under the plan being tested are taken into account to compute the EBR's. However, when computing the average benefit ratio test under 1.401(a)(4)-2©(3)(iii), it provides that a plan satisfies the average benefit ratio test if the plan of which it is a part satisfies 1.410(B)-5. Which means that the plan has to apply the average benefits test as if you were doing a regular coverage test. I understand this to mean that you are required to include contributions or benefits from all plans maintained by the employer that are part of the testing group that includes the plan being tested. I'm not sure I'm conveying this lucidly, but what I come out with, having to take into account 1.410(B)-5, is that you do have to include the other plans for EBR testing in each plan. This seems to make some amount of sense where you have a cross-tested and a non cross-tested plan. But I've never had to consider how to apply it with two cross-tested plans of the same employer...thankfully I've never seen such a situation!

[Mike Preston]

Pretty sure. If one tests by combining the EBRs then one must, per the gateway rules, provide a gateway based on the entire group. Since the gateway regs make it clear you don't have to do that, there must be a mechanism for using EBR's of a subset.

[Belgarath]

I think we may be agreeing, but I'm just stating it badly. Yes, you can test as stand alone. However, if you end up having to use the average benefits test in order to pass, part of the average benefits test requires aggregating the benefits and contributions of all the plans of the employer. And this might screw up your results from the stand alone testing. Or is this not at all what you are saying? Thanks!

[Mike Preston]

Combining plans for ABT testing does not in any way imply that one must combine the plans for gateway testing.

[Belgarath]

Got it. Thanks for clarifying this - I was going off on a tangent, instead of looking at the actual question. I have a tendency to do that...

[Guest Keith N]

Just to bury this dead horse (since it's already been beaten into the ground)...

Let's say I have a SH401(k) and I'm allocating 3% to all eligible employees. I also have a cross-tested PS allocation and I'm using the 5% Gateway. Eligibility is 21/1 and I have a 1000 hour and Last Day rule to receive an allocation.

One of my employees terminates before completing 500 hours. Because she is "benefiting" (3% 401(k) SH), she will not meet the definition of "excludable" under 410(B)-6(f), and therefore she must get the 5% gateway.

Is that correct?

[Blinky the 3-eyed Fish]

Yes.

[Guest merlin]

For anyone who did not attend the ASPA conference, here is the answer from the IRS Q&As. Unfortunately it was in the group of questions that was to be discussed from the podium and they never got to it.

"The regulations suggest that any participant who is eligible for a contribution that could be permissively aggregated under 1.410(B)-7(d) ( ratio percentage test) must receive the gateway minimum. That would mean (for example) participants in a top heavy plan who are not entitled to the employer cross tested contribution, because they have less than 1,000 hours,would have to get the gateway minimum, because the top heavy contribution could be aggregated with the cross tested contribution under 1.410(B)-7(d) (assuming that the plan otherwise meets the 410(B) requirements). This would also be the case if the top heavy minimums are provided under a separate plan than the one providing the cross tested allocation.

However,if the top heavy contribution is made to a separate plan and the plans have different plan years, the participants would not have to receive the gateway minimum, due to 1.410(B)-7(d)(5),which prohibits the aggregation of plans with different plan years for purposes of the ratio percentage test."

I think this says (indirectly) that those participants who are getting the t/h minimum as a result of their participation in the "k" portion of the plan don't have to get the gateway because the "k" cannot be aggregated with the ps portion.

Anyone? Anyone? Bueller? Bueller?

[Guest merlin]

For anyone who did not attend the ASPA conference, here is the answer from the IRS Q&As. Unfortunately it was in the group of questions that was to be discussed from the podium and they never got to it.

"The regulations suggest that any participant who is eligible for a contribution that could be permissively aggregated under 1.410(B)-7(d) ( ratio percentage test) must receive the gateway minimum. That would mean (for example) participants in a top heavy plan who are not entitled to the employer cross tested contribution, because they have less than 1,000 hours,would have to get the gateway minimum, because the top heavy contribution could be aggregated with the cross tested contribution under 1.410(B)-7(d) (assuming that the plan otherwise meets the 410(B) requirements). This would also be the case if the top heavy minimums are provided under a separate plan than the one providing the cross tested allocation.

However,if the top heavy contribution is made to a separate plan and the plans have different plan years, the participants would not have to receive the gateway minimum, due to 1.410(B)-7(d)(5),which prohibits the aggregation of plans with different plan years for purposes of the ratio percentage test."

I think this says that those participants who are getting the t/h minimum as a result of their participation in the "k" portion of the plan don't have to get the gateway because the "k" cannot be aggregated with the ps portion,which appears to correspond to the idea of disaggregating the otherwise excludables. But the notion of a 2nd plan with a different year comes out of left field.

Anyone? Anyone? Bueller? Bueller?

[Guest lforesz]

Hi,

It the person is only eligible for the k portion, then I think you would be correct. But, if they must get a top heavy, then it sounds like they would need the gateway ctb because the top heavy can be aggregated with the Profit Sharing ctb. How about if the person is not yet eligible for the PS (due to length of service ) but gets a top heavy minimum. I would think they would need the MAG as well. I realize they are not benefitting under the profit sharing portion, but since the top heavy minimum can be aggregated with the PS, I suppose we are stuck giving it to them as well.

Anyone??

[Tom Poje]

Lori:

see my comments on page 2 of this thread.

if the person has never completed a year of service, then you would not have to increase the person to the gateway, but only if you test the plan as two separate plans -those that met statutory exclusions and the otherwise excludables.

[AndyH]

Yesterday at ASPA's closing session Sal Tripodi specifically addressed this (Keith's) question, and said it is the subject of an imminent ASPA ASAP.

Yes, these people need to get the 5%, unless, as Tom correctly points out, they can be disaggregated for age and service (although Sal Tripodi did not say that). He was referencing somebody who did not get more than 3% on account of an hour or last day reqirement.

He recommends a separate allocation class consisting of people eligible only for the SHNEC. Then give them an extra 2% if needed.

I do find it interesting that he said nothing about limiting this group to people who meet the 21/1 year standard, however.

[dmb]

I have a top heavy cross tested ps plan, no 401k plan. The low class is getting 8% of comp to max out owners. There is one participant in the lower class who did not work 1000 hours. After reading prior posts, i'm still a bit confused. Does this participant have to receive 8% of comp allocation or can they receive only the 5% gateway?? Thanks.

[Tom Poje]

the person who received the top-heavy 3% is considered benefitting, therefore he must be kicked up to 5% to satisfy the gateway (but not the 8%).

perhaps you could think of it this way.

cross testing is converting a DC contribution to a DB benefit.

so, you sort of like have a DB/DC combo plan.

Now, what is the top heavy minimum in a combo plan? lo and behold 5%! hey there is method in the government madness.

of course, things can get real strange.

suppose you have a calendar year plan and ee works 1000 hours, enters 7/1, and definition of comp is based on date of entry.(def of comp is also comp - bonus)

the person then gets either 3% top heavy based on full year, or 5% gateway based on total comp from date of entry or 8% of comp - bonus

[Blinky the 3-eyed Fish]

Keep in mind, though, that your document must allow for the person to get only the gateway.

[dmb]

Ok, now we're getting somewhere. plan will pass the rate group and avg. bfts test. What you're saying is that if there isn't a separate class for "top heavy minimum only" participants, anyone who works less than 1000 hours and entitled to the top heavy minimum would have to get the 8% rather than the 5% gateway.

Thanks.

[Blinky the 3-eyed Fish]

Andy, whether or not the person has to be in their own class depends on the wording of the document. Our documents have language that is like the provisions for top heavy. In other words, there's wording that kicks the benefiting party up to the minimum gateway amount. In fact the way our documents are worded, the person could not get the 8%, because he didn't satisfy the accrual requirements for it.

[AndyH]

Blinky, good point, and very good idea.

[dmb]

Along the same lines, i have another question. Where do forfeitures fit into the gateway minimum. I have a plan with one HCE and a handful of NHCEs. the NHCE gets $7,000 in forfeitures so his PS alloc is $33,000, which based on $200,000 of comp is 16.5%. the forfeiture alloc is 3.5%, which is the same for everyone receiving an allocation. The gateway would be 5% (assuming plan passes non-discrim testing). Are the forfeitures included in that gateway minimum or is the 5% on top of the forfeitures?? Thanks. The plan is not Top Heavy, let's not go there this time.

[Guest PLHart]

I believe the total p/s allocation (which would indeed include forfeitures) is used for all x-testing purposes including minimum gateway requirements --

I also need to clarify how this thread pertains to a case I am currently working on...

If I have two separate plans of a single employer, a one year eligibility 401(k) and a two year eligibility new comp p/s, and they are top-heavy, must participants who receive their top-heavy minimum contribution via the 401(k) plan (those with one year of service but less than two) also receive the minimum gateway contrib (as they would if it were one plan)? Please help...

[dmb]

so even though the employer is contributing over 15% for the HCE, as long as the total allocation for each NHCE is at least 5% the plan's ok???

[Blinky the 3-eyed Fish]

PLHart, the answer to your question depends on whether you are aggregating the plans for coverage and nondicrimination testing. If aggregating, then the gateway would need to be provided to those participants that got a top heavy minimum.

Dmb, for purposes of rate group testing and the gateway requirements forfeitures allocated are no different that nonelective contributions. In answer to your last question, yes, your plan would satisfy the gateway requirements. However, it still would need to pass the general testing to be ok.

[AndyH]

So, the second plan concept is obviously dependent upon separate testing for 401(a)(4) and 410(B), and presumably satisfying top heavy in a second plan does not somehow require you to aggregate for 401(a)(4) and 410(B). I guess that is right.