Guest MichaelO

Top Heavy Allocation

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Guest MichaelO   
Guest MichaelO

I have a profit sharing plan(comp to comp, not cross-tested) with a last day and 1000 hours requirement and 3 participants. One worked 575 hours but did not terminate. She is only eligible for the top heavy minimum. They do not pass coverage without her so I think I can test under 401(a)(4), which passes. My question is: Does the gateway minimum come into play in this instance since it is not a cross-tested formula? Would she have to get a 5% Gateway instead of the 3% top heavy minimum since she is not eligible for the regular profit sharing allocation?

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Tom Poje    218

Before even starting an answer, lets say this.

It is unimportant that a plan has a 'cross tested formula' as you described it before you worry about the gateway minimum. if a DC plan tests on an accrual basis then the gateway rules come into play.

In your particular case, you actually have a 'cross tested formula' anyway - you have 2 classes of people - one getting one % and the other getting 3%

ok, lets see if this flies with the facts provided.

you said there were 3 participants, one gets top heavy only, so I will assume the following

1 hce

1 nhce full benefit

1 nhce top heavy.

for coverage, sched T, 100% benefit

for nondiscrim, initial pass 50% of NHCE receive same rate as HCE so plan fails ratio %

NHCE concentration % = 2/3 = 66% so midpoint = 40.50%

ratio % > 40.50 so plan passes nondiscrim classification test.

Under the rules, 2 allocation rates may be aggregated in a manner similar to the rules that permit aggregation of BRFs. The example in the preamble reads something like this: One group receives 10%, another group 3%. If the group thet receives 10% satisfies 410(b) (WITHOUT REGARD TO THE AVERAGE BENEFITS % TEST) then the 10% group can be allocated with the 3% group and treated as a single allocation rate for purposes of determining whether the plan has broadly available allocation.

Thus it appears that your plan has broadly available rates and therefore would not have to provide the minimum allocation gateway.

But even all that aside, what would happen if the plan was tested on an allocation basis, and thus not cross tested.

You indicated the plan was comp to comp.

lets suppose the formula gave 9% to the 2 ees, and the HCE is at 200,000.

testing (w disparity) would produce the follwing:

HCE 9% + 5.7% = 14.7%

NHCE 1 same

NHCE 2 3% + 3% = 6%

ratio % =50% which, as indicated above is sufficient to pass nondiscrimination classification test.

avg ben % test

HCE = 70% * 14.7 = 10.29

NHCE = (14.7 + 6 ) / 2 = 10.35

this would pass avg benfit % test, so plan passes nondiscrim on allocation basis

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Guest MichaelO   
Guest MichaelO

The Profit Sharing formula is actually integrated at 5.7% of the Taxable Wage Base. The base allocation is 16.78% to the HCE and the eligible NHCE so the HCE gets the max 40,000 with Integration. Does this change the answer?

Thanks for your help Tom

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AndyH    23

Michael,

If you have a safe harbor then you are not subject to the gateway. You do not.

If you can pass using the general test on a contributions basis, then you are not subject to the gateway. You might be able to do so. Need the details.

If you must cross test but can meet the broadly available rules that Tom outlined then you do not need the gateway.

If you must cross test but do not meet the broadly available rules, you must provide the gateway (unless you meet another exception that you don't, or at least don't appear to).

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Guest MichaelO   
Guest MichaelO

Thank you Andy. That is very helpful.

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Tom Poje    218

if base % is 16.78 then doing the numbers, plan fails testing on allocation basis.

it appears plan can be treated as having broadly available rate bands (differences due to integration are disregarded.

therefore plan can now cross test - no gateway allocation required since another gateway has been met. hopefully at least one NHCE will have an E-Bar greater than the HCE

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Mike Preston    256
If you can pass using the general test on a contributions basis, then you are not subject to the gateway. You might be able to do so. Need the details.

First, let's repeat what Tom said so that it is understood that this plan does indeed satisfy the definition of broadly available allocation rates.

Nonetheless, let's assume it had failed the broadly available allocation rates test.

While it appears not to satisfy the general test if you are performing the ABT on the basis of contributions, you can perform the ABT on the basis of cross-testing without subjecting the entire plan to the gateway requirements. The ABT appears to be: HCE = 22.48% * 0.7 = 15.74% which is greater than (22.48% + 6%) / 2 = 14.24%, which is not satisfied. However, it is pretty close and if tested on a benefits basis may very well work. Hence, as Andy indicated: not enough information.

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AndyH    23

Mike calc'd that faster than me. I'm shocked! Just shocked! But I agree. And, for the benefit of Michael O and possibly other viewers, if the sponsor had a 401(k) plan or feature and employees had deferrals, that would be included in the ABPT and might be enough to make it pass.

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Guest MichaelO   
Guest MichaelO

Testing on a benefits basis does work. Thanks again to everyone for your help.

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