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Plan facts:

3%SH to all

discretionary PS to all

3 HCES, 3NHCEs, young owner, mixed age staff

each participant is in own allocation rate for PS

Can the employer "cherry pick" a particular participant - who happens to be youngest and new ppt mid-year w lowest eligible pay - such that his own RG passes (a)(4)? The remaining NHCEs will receive at least GW minimum. Doing this passes all (a)(4) testing, 410b easily.  My hesitation is because of perceived bottom up allocation... would it be better to "cherry pick" an existing but younger ppt who earns $100k (obviously more expensive to do so)?

FYI, the other 2 HCEs are receiving the 3% SH plus 1% PS, their indiv RGs pass easily.

Thank you.

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On 1/29/2019 at 2:23 PM, cheersmate said:

Plan facts:

3%SH to all

discretionary PS to all

3 HCES, 3NHCEs, young owner, mixed age staff

each participant is in own allocation rate for PS

Can the employer "cherry pick" a particular participant - who happens to be youngest and new ppt mid-year w lowest eligible pay - such that his own RG passes (a)(4)? The remaining NHCEs will receive at least GW minimum. Doing this passes all (a)(4) testing, 410b easily.  My hesitation is because of perceived bottom up allocation... would it be better to "cherry pick" an existing but younger ppt who earns $100k (obviously more expensive to do so)?

FYI, the other 2 HCEs are receiving the 3% SH plus 1% PS, their indiv RGs pass easily.

Thank you.

As Cuse Fan notes, there is absolutely no problem "cherry picking" for the best result.  However, I think it important to note that the person who is getting the allocation must be vested at some level for the -11g allocation to meet the regs.  If you have a 2/20 vesting and this guy only has one year and is 0% vested, you can't use him UNLESS (and this is what we do), in addition to the allocation in the -11g, we also through in a 10% vesting on the guy who is otherwise 0% vested.

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In this situation the plan requires only 60 days for eligibility bc the employer needs to capture certain level of talent and feels the rapid entry is necessary. Generally v little turnover, but those who have left were vested at some level. It is fully expected the new hire, who is full time and salary is near 6 figures is expected to work indef into the future. Having said that if he terminates before a 1000 hrs in 2019 he would not vest in the PS allocation portion of his acct.  

Given this and my original concern that Tom Poje references it seems it would be best to "cherry pick" the next participant who is vested partially already.  Or have I missed anything? 

Finally I am not clear why an -11g amendment is needed - what am I missing, please if you wouldn't mind?

Many thanks to everyone!

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my point exactly, I didn't see the -11g issue either

I'm going to guess you are probably ok (obviously no one knows the future. if you pick someone partially vested they could quit next year, while the new ee may work 20 years)

certainly the IRS concern would be picking the lowest paid ee who is either terminated or never will work 1000 hours or something like that.

The IRS did recently try to require plans with every person in their own group could only rely on the ratio % test, which would prevent situations like this from arising. I think they sum it up best, yes you can pass mathematically but is that a reasonable interpretation of the intent.

of course the testing rules were put in place before the idea of 'each person in their own group' was imagined, so maybe someday things will catch up.

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6 hours ago, cheersmate said:

In this situation the plan requires only 60 days for eligibility bc the employer needs to capture certain level of talent and feels the rapid entry is necessary. Generally v little turnover, but those who have left were vested at some level. It is fully expected the new hire, who is full time and salary is near 6 figures is expected to work indef into the future. Having said that if he terminates before a 1000 hrs in 2019 he would not vest in the PS allocation portion of his acct.  

Given this and my original concern that Tom Poje references it seems it would be best to "cherry pick" the next participant who is vested partially already.  Or have I missed anything? 

Finally I am not clear why an -11g amendment is needed - what am I missing, please if you wouldn't mind?

Many thanks to everyone!

Sorry, didn't follow that you were dealing with passing non-discrim with the initial allocation schedule and if you do so, you do not need an -11g amendment and vesting is not an issue at that point. So, the answer is still the same: cherry pick as much as you wish in this situation; I would not worry about picking the next participant who is vested already.

Larry.

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Agreed, sounds fine.  I think "the Gold Standard" memo was for really abusive practices, such as bringing in very short term employees for December to skew testing results.  Have no issue with someone who was in the plan half the year.  IAW Larry & Tom vesting is not an issue here - only if bringing them in after the fact via -11(g).

My only caution is that employers may not want to do this for personnel reasons.  Different clients have different thoughts on this, but it's not unheard of for employees compare notes on things like PS contributions.   It's easier when the dollar amounts are close even though percentage wise one employee is getting a lot more to pass the test.  

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  • 1 year later...
On 1/31/2019 at 4:33 PM, Larry Starr said:

Sorry, didn't follow that you were dealing with passing non-discrim with the initial allocation schedule and if you do so, you do not need an -11g amendment and vesting is not an issue at that point. So, the answer is still the same: cherry pick as much as you wish in this situation; I would not worry about picking the next participant who is vested already.

Larry.

Hello Larry -

As a matter of follow up to your comment "vesting is not an issue at that point" - when is vesting an issue?  Allow me to illustrate my concern with a similarly situated plan for the 2019 plan year who is trying to finalize figures now-

 

SHM401kPSP where 2019 is Plan Year #2 for this case, so at most, ppts are 20% vested. In addition to the ADP SHM, the Employer has elected to contribute an ACP SHM - the 1 HCE and 2 NHCEs benefit

7 ppts: 1 HCE, 6 NHCEs (2 of whom terminated in 2019, 1 is vested 20%, 1 is not vested).

Plan Sponsor is considering depositing 9% PS for the owner, who is relatively young

Staff is mixed PT and FT, elig is 2 mos wait/no min age

To pass RG testing 3% to the NHCEs is sufficient however not passing ABT, so to pass the RG at 70%, the PS allocation rates have been increased via "cherry picking" per person to amounts needed for 3 of the 6 NHCE ppts.

NHCEs 1, 2, 3 are at 3% PS;  NHCE 4 is 6% PS and NHCEs 5, 6 are at 5.1% PS

Question is related to this and the vesting issue... 1 of the 3 who are increased over the 3%PS was terminated in 2019 w zero vesting (PT never converted to FT prior to terminating) and another of the 3 increased has since terminated in 2020 due to COVID - was FT - but zero vested at term... is this a problem w the above "cherry picking" PS allocation rates?  And if it is problematic (1) would the vesting issue be negated if the employer increases all 6 NHCEs to the highest allocation rate provided to any 1 of the 6 HCEs, i.e. 6%? and/or (2) could the employer adopt a Plan Amendment to provide 10% vesting to all participants w vesting service = 0 <2Years (to elim this now and in future as well)?

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To clarify, this not an amendment situation wrt to allocations. All ppts are in their own RG. Having said that, my concern is whether the Plan sh be amended to provide some level of vesting given the illustrated PS allocations especially since some of the ppts are 0% vested and the plan does have a 'short service' waiting period to enter the plan, which in application permits PT employees to enter. There are no last day, no min hrs requirements for allocation purposes. Given these f+c should the plan be amended to provide some level of vesting starting at zero Years of Vesting Service, say 10% or 20%, or even switch vesting service to an elapsed time crediting basis, to avoid being interpreted as abusive in practice as per the "IRS comments memo" referenced earlier in this thread? 

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There is no one answer.  Personally I'd look at how the plan normally works and why it was designed the way it is.  If the sponsor wanted short eligibility to help with recruiting and be able to provide an employee benefit sooner, and some years the short service ees didn't really impact testing, then I'd probably not worry about vesting in an odd year when it does matter.   If OTOH the plan was designed to intentionally manipulate the testing results with short service PT NHCEs who never vest, then I'd probably recommend some minimum level of vesting for them.  YMMV.

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