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Gateway Minimum


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We have an ERISA attorney reviewing a dc document (it's a new comparability plan), and he is questioning the gateway allocation. The plan has last day and 1,000-hour requirements and is providing 3% SH.

There are two participants who received a 3% SH but have terminated employment before year end and both are in the covered test.

The ERISA attorney is having a hard comprehending that those two participants require a gateway minimum (5% in this example) because the document does not explicitly state the gateway minimum overrides the last day/1,000- hour requirements. The gateway definition only states that it must be give to NHCEs.

He further says that since this is discretionary contribution, the HCEs should lower their allocation (ie to 9%) instead of having to give those two participants an additional 2%.

Any opinion would be appreciated.

Thanks

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The attorney is correct. That is the most fundamental issue when designing a New Comparability plan with accrual requirements. Many prototype documents has a box to select stating that those who fail to meet the accrual requirements for additional contributions will be allowed an allocation to meet the mimimum gateway. Without such provision written in the plan, then you violate the definitely determinable formula when you attempt to give them an additional allocation.

Sorry to be the bearer of bad news.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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without seeing the exact definition in the gateway, it is unclear.

saying that it 'must be given to NHCEs' is unclear, for the regs require it be provided to NHCEs who receive a nonelective, not necessarily all NHCEs.

If the definition, for lack of a batter term (without seeing it) 'imples' that the gateway minimum will be satisfied, then there may be an argument for providing the gateway - a number of documents are written vaguely enough in an attempt to cover all bases, but you do have to be careful.

All that being said, if the document does indeed have no gateway language, you could always put in a corrective amendment to bump the 2 people up to the level necessary to satisfy the gateway, which accomplishes the same thing, but with an extra step. (and probably makes the HCEs happy because they get more) assuming of course you are within the 9 1/2 months necessary to put in such an amendment.

or since the formula is discretionary you could of course limit the HCEs to 9% as well.

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The gateway definition only states that it must be give to NHCEs.

It probably hinges on this exact language; do you care to post it?

In any event, as noted, if this language does not trigger a gateway, then they could always do a corrective amendment. The attorney may be right but s/he doesn't appear to be giving the sponsor all of its options.

Ed Snyder

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The gateway definition only states that it must be give to NHCEs.

It probably hinges on this exact language; do you care to post it?

In any event, as noted, if this language does not trigger a gateway, then they could always do a corrective amendment. The attorney may be right but s/he doesn't appear to be giving the sponsor all of its options.

Let me see what I can do without identifying the vendor; it is a VS doc.

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Tom,

I think the administrator offered an amendment under -11(g) but I attorney nixed the idea. I'm trying to get a detailed reason as to why he didn't like a corrective amendment since I was not involved with the attorney directly.

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The attorney is correct. That is the most fundamental issue when designing a New Comparability plan with accrual requirements. Many prototype documents has a box to select stating that those who fail to meet the accrual requirements for additional contributions will be allowed an allocation to meet the mimimum gateway. Without such provision written in the plan, then you violate the definitely determinable formula when you attempt to give them an additional allocation.

Sorry to be the bearer of bad news.

Good Luck!

How can you draw this conclusion without knowing what the document says? How can you conclude that this is a prototype document? if I had to guess, I would say that the attorney may be incorrect.

And 11-(g) was later mentioned, which sure seems like a viable option to me.

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The attorney is correct. That is the most fundamental issue when designing a New Comparability plan with accrual requirements. Many prototype documents has a box to select stating that those who fail to meet the accrual requirements for additional contributions will be allowed an allocation to meet the mimimum gateway. Without such provision written in the plan, then you violate the definitely determinable formula when you attempt to give them an additional allocation.

Sorry to be the bearer of bad news.

Good Luck!

How can you draw this conclusion without knowing what the document says? How can you conclude that this is a prototype document? if I had to guess, I would say that the attorney may be incorrect.

And 11-(g) was later mentioned, which sure seems like a viable option to me.

I didn't draw a conclusion, but spoke to a fact pattern. The ERISA attorney viewed the document. I was merely reiterating what the ERISA attorney was saying. How could you possibility disagree with accounting for the gateway when providing a Safe Harbor Nonelective contribution to all NHCEs and not having sufficient language to take them up to 5% in the event it is needed to pass the gateway? Now, we are saying the language is vague enough to support the additional allocation. I'm merely saying that is obvious the attorney is saying the language is not there.

Also, there are certain issues when attempting to amend a safe harbor 401(k) plan. Are we sure an 11-g amendment of this type will be acceptable. Would your answer be the same if the language in the amendment contradicts information communicated to the participants in the Safe Harbor Notice?

Also, I didn't say it was a prototype document, but saying "to address the fundamental issue, this is what many prototype documents had done".

Are we good?

CPC, QPA, QKA, TGPC, ERPA

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The gateway definition only states that it must be give to NHCEs.

It probably hinges on this exact language; do you care to post it?

In any event, as noted, if this language does not trigger a gateway, then they could always do a corrective amendment. The attorney may be right but s/he doesn't appear to be giving the sponsor all of its options.

Let me see what I can do without identifying the vendor; it is a VS doc.

Here is the portion defining gateway:

Minimum Allocation Gateway. The term Minimum Allocation Gateway means, for Plan Years beginning on or

after January 1, 2002, a minimum allocation that must be provided to each Non-Highly Compensated Employee

who receives an allocation of any Non-Elective Contribution (including any ADP Safe Harbor Non-Elective

Contribution) or any Qualified Non-Elective Contribution under this Plan (or any other defined contribution plan

that is aggregated with this Plan) that performs the general test for non-discrimination based upon Equivalent

Accrual Rates as set forth in Regulation §1.401(a)(4)-8. Notwithstanding the above, in determining the

Benefiting Participants for purposes of the Minimum Allocation Gateway, the permissive disaggregation rules

under Regulation §1.410(b)-6(b)(3)(ii) and §1.410(b)-7©(3) will be applied. The Minimum Allocation Gateway

is subject to the following rules:

(a) Minimum Allocation Gateway Satisfied So Long As This Plan Is Not Aggregated With Any Defined

Benefit Plan. The Minimum Allocation Gateway can be utilized so long as neither this Plan nor any other

defined contribution plan (that is aggregated with this Plan) is aggregated with any defined benefit plan in

applying the general test for non-discrimination based upon Equivalent Accrual Rates for the defined

contribution plan(s). If this Plan or any other defined contribution plan (that is aggregated with this Plan) is

aggregated with any defined benefit plan for purposes of applying the general test for non-discrimination

based upon Equivalent Accrual Rates for the defined contribution plan(s), then the Minimum Allocation

Gateway pursuant to this definition will not satisfy the requirements of Regulation §1.401(a)(4)-9.

(b) Minimum Allocation Gateway Amount. The amount of the Minimum Allocation Gateway is equal to the

lesser of (1) five percent (5%) of the Participant's Code §415©(3) Compensation; or (2) one-third of the

Allocation Rate of the Highly Compensated Employee with the highest Allocation Rate.

© Satisfaction of Minimum Allocation Gateway. The Minimum Allocation Gateway may be satisfied with

any Non-Elective Contributions (including any ADP Safe Harbor Non-Elective Contributions) or any

Qualified Non-Elective Contributions.

(d) No Permitted Disparity. For purposes of this definition, allocations and Allocation Rates must not take into

account the imputation of permitted disparity under §1.401(a)(4)-7.

(e) Compensation Limited to Compensation After Entry Date. For purposes of determining if the Minimum

Allocation Gateway of paragraph (b) has been satisfied, Code §415©(3) Compensation will be limited to

the Participant's Code §415©(3) Compensation on and after a Participant's Entry Date of the Plan's

component subject to the Minimum Allocation Gateway.

(f) Treatment of Otherwise Excludable Participants. For purposes of the Minimum Allocation Gateway,

Otherwise Excludable Participants will not be considered.

Here is the portion about testing where it refers to gateway:

General Non-Discrimination Test Requirements. For Plan Years beginning on or after January 1, 2002, if the

Sponsoring Employer applies the general test for non-discrimination as set forth in Code §401(a)(4) based upon

Equivalent Accrual Rates to demonstrate that a Non-Safe Harbor Non-Elective Contribution that is made to this

Plan is non-discriminatory, or if a Non-Safe Harbor Non-Elective Contribution that is made to this Plan is

aggregated with one or more other plans of the Sponsoring Employer so that the Sponsoring Employer can apply

the general test for non-discrimination set forth in Code §401(a)(4) based upon Equivalent Accrual Rates for the

defined contribution plan(s) (including this Plan) to demonstrate that the plans (including this Plan) are nondiscriminatory,

then the following rules will apply:

(a) Defined Contribution Rule. If this Plan (or any defined contribution plan(s) which are aggregated with this

Plan) is not aggregated with any defined benefit plan of the Sponsoring Employer for purposes of applying

the general test for non-discrimination based upon Equivalent Accrual Rates for this Plan (or any defined

contribution plan(s) which are aggregated with this Plan), then any NHCE who is a Participant in this Plan

(or, if any defined contribution plan(s) are aggregated with this Plan, any NHCE who is a Participant in this

Plan or the other defined contribution plan(s)) and who receives an allocation of Non-Elective Contributions

and/or QNECs must receive an allocation of Non-Elective Contributions and/or QNECs that is at least equal

to the Minimum Allocation Gateway for the Plan Year, subject to the following provisions:

(1) Circumstances When Minimum Allocation Gateway Not Required. The Minimum Allocation

Gateway requirement need not be satisfied if this Plan (or the group of any defined contribution plan(s)

which are aggregated with this Plan) has Broadly Available Allocation Rates or a Gradually Increasing

Age or Service Schedule.

(2) Treatment of Otherwise Excludable Participants. For purposes of this paragraph (a), Otherwise

Excludable Participants will not be considered.

(b) Combination of Defined Benefit/Defined Contribution Rule. n/a

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Well, I have to admit I'm not sure, but I don't see that language telling you how to meet the gateway, just that you have to do it. So no, I don't think that authorizes an increase just for those participants who otherwise wouldn't get 5%. That leaves reducing the HCEs to 9% or doing an -11(g) corrective amendment (which frankly is no big deal and I don't see why the attorney is challenging this).

Ed Snyder

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I would have leaned the other way and said since it says anyone

"who receives an allocation of Non-Elective Contributions

and/or QNECs must receive an allocation of Non-Elective Contributions and/or QNECs that is at least equal

to the Minimum Allocation Gateway for the Plan Year"

In other words, regardless of any other conditions, you "must' bump these people up, because the document says if you receive any nonelective it has to be at least = the gateway. but of course, that is only a guess.

The mere fact the language is in the document implies (I'm guessing) that it is the intent of the documnet provider to be proper gateway language. otherwise you are simply including language that is stating a fact that is already known. Could it be clearer? well, of course, otherwise you wouldn't even be discussing the issue. Can you ask the documnet provider if that is the intent?

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Bird, why would an 11-g amendment be needed? The document has in it that anyone getting an ER contribution will get the gateway. So it's built in right there. Even though the gateway is a moving target. I think if you leave the HCE's at 15+%, then you can give the two the extra 2% and be fine with no amendment needed.

If the plan is otherwise failing after just giving them the gateway, and they wanted to bump those one or two people up, then the amendment would be needed.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I would have leaned the other way and said since it says anyone

"who receives an allocation of Non-Elective Contributions

and/or QNECs must receive an allocation of Non-Elective Contributions and/or QNECs that is at least equal

to the Minimum Allocation Gateway for the Plan Year"

In other words, regardless of any other conditions, you "must' bump these people up, because the document says if you receive any nonelective it has to be at least = the gateway. but of course, that is only a guess.

The mere fact the language is in the document implies (I'm guessing) that it is the intent of the documnet provider to be proper gateway language. otherwise you are simply including language that is stating a fact that is already known. Could it be clearer? well, of course, otherwise you wouldn't even be discussing the issue. Can you ask the documnet provider if that is the intent?

I asked the vendor about the language (no response yet), and historically, their the language has been vague, and I prefer it that way, instead of having it written down for each possible scenario.

I also have a document from a different vendor and they define participants who are eligible for gateway to be anyone receiving employer contributions, other than match cotribution. This language does not state that the contrbution requirements are superceded by gateway for NHCEs.

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Bird, why would an 11-g amendment be needed?

Gut feel/vague recollection and some degree of reasoning...

I think I remember doing amendments for GUST restatements that looked a lot like this language, because the IRS required them, but I also think I was told by our then-document provider that this didn't specifically authorize extra contributions; they just wanted the gateway language in the plan.

I think the problem here is that it just says you have to meet the gateway, not how - you have the option to reduce HCE contributions to 9%. So it's not definitely determinable. By contrast, if you look at the top heavy language in any plan, I'm quite sure it will say something like (as ours do):

This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the Plan Year because of: (i) the Participant's failure to complete 1,000 hours of service (or any equivalent provided in the Plan); (ii) the Participant's failure to make mandatory employee contributions to the Plan; or (iii) compensation less than a stated amount.

So it's very specific about the effective override of the service requirement. The gateway language that we're discussing here doesn't say that.

FWIW, our current Fort William document has this great language that says we can waive allocation requirements (last day/1000 hours) if a participant is getting another 'er contribution; that's in the basic plan document. The adoption agreement has a reference to the BPD "...for 'failsafe' rules regarding the gateway test." There is no definition of the gateway test that I can find.

Ed Snyder

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Bird, why would an 11-g amendment be needed?

Gut feel/vague recollection and some degree of reasoning...

I think I remember doing amendments for GUST restatements that looked a lot like this language, because the IRS required them, but I also think I was told by our then-document provider that this didn't specifically authorize extra contributions; they just wanted the gateway language in the plan.

I think the problem here is that it just says you have to meet the gateway, not how - you have the option to reduce HCE contributions to 9%. So it's not definitely determinable. By contrast, if you look at the top heavy language in any plan, I'm quite sure it will say something like (as ours do):

This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the Plan Year because of: (i) the Participant's failure to complete 1,000 hours of service (or any equivalent provided in the Plan); (ii) the Participant's failure to make mandatory employee contributions to the Plan; or (iii) compensation less than a stated amount.

So it's very specific about the effective override of the service requirement. The gateway language that we're discussing here doesn't say that.

FWIW, our current Fort William document has this great language that says we can waive allocation requirements (last day/1000 hours) if a participant is getting another 'er contribution; that's in the basic plan document. The adoption agreement has a reference to the BPD "...for 'failsafe' rules regarding the gateway test." There is no definition of the gateway test that I can find.

I saw that in my review since we're considering moving to Ft. William.

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I would have leaned the other way and said since it says anyone

"who receives an allocation of Non-Elective Contributions

and/or QNECs must receive an allocation of Non-Elective Contributions and/or QNECs that is at least equal

to the Minimum Allocation Gateway for the Plan Year"

In other words, regardless of any other conditions, you "must' bump these people up, because the document says if you receive any nonelective it has to be at least = the gateway. but of course, that is only a guess.

The mere fact the language is in the document implies (I'm guessing) that it is the intent of the documnet provider to be proper gateway language. otherwise you are simply including language that is stating a fact that is already known. Could it be clearer? well, of course, otherwise you wouldn't even be discussing the issue. Can you ask the documnet provider if that is the intent?

I agree with Tom.

I don't think it is as vague as others say.

"(b) Minimum Allocation Gateway Amount. The amount of the Minimum Allocation Gateway is equal to the

lesser of (1) five percent (5%) of the Participant's Code §415©(3) Compensation; or (2) one-third of the

Allocation Rate of the Highly Compensated Employee with the highest Allocation Rate."

They got a non-elective, they need to get a gateway minimum.

IMHO

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