Class allocated profit sharing with last day of year employment condition

[Tom]

Question - a plan is class-allocated for 2020 and has allocation conditions (1000 hours and last day of the year employment) for profit sharing.  That obviously means someone who did not meet the allocation conditions will not receive profit sharing contribution.  But is the reverse true?  Does someone who did meet the allocation conditions have to receive a profit sharing contribution? Seems the employer could choose not to contribute to that "class" (one employee in the class.)  In other words, the class allocation funding decision comes first.  The plan is not top-heavy and includes a safe harbor match.

The reason I am asking - the profit sharing decision is being made now for 2020 and several employees who met allocation conditions for PS for 2020 terminated employment in 2021.

Comments?  And thank you!

(We are removing allocation conditions and pretty much making all plans class-allocated with Cycle 3.)

Tom

 

[C. B. Zeller]

If by "class-allocated" you mean that every participant is in their own group, then yes - as long as the document provides that contributions to each group are totally discretionary, the employer can elect to  contribute $0 to any particular group.

One good reason to keep a last day requirement, even with each participant in their own group, is that it allows you to exclude terminees with less that 500 hours of service from the coverage test. If you have low turnover, or a HCEs who do not receive an allocation, this may not be a concern.

[Barry Levy]

For cross-tested plans I believe each eligible NHCE must have an allocation rate that is not less than the lesser of 5%, or one-third of the allocation rate of the HCE with the highest allocation rate.

[Bri]

That only applies to NHCEs who specifically are benefiting.  And with no TH minimum forced upon the person, they could indeed be set to zero (coverage/nondiscrimination testing notwithstanding)

[Gilmore]

On 6/28/2021 at 2:26 PM, C. B. Zeller said:

One good reason to keep a last day requirement, even with each participant in their own group, is that it allows you to exclude terminees with less that 500 hours of service from the coverage test. If you have low turnover, or a HCEs who do not receive an allocation, this may not be a concern.

Good point CB.  I've also thought it was good to have a last day rule so that no participant actually had earned a right to an allocation in case you needed to amend the plan.

[Bird]

On 6/28/2021 at 5:26 PM, C. B. Zeller said:

One good reason to keep a last day requirement, even with each participant in their own group, is that it allows you to exclude terminees with less that 500 hours of service from the coverage test. If you have low turnover, or a HCEs who do not receive an allocation, this may not be a concern.

Agreed but the flip side is that you might want to give one of these folks an allocation.  Yes you can do an -11g amendment but since most of our plans are using a safe harbor nonelective they are already getting something so the coverage test is not a concern.  We've dropped allocation conditions on most of our everyone-in-their-own-group plans.

[C. B. Zeller]

5 minutes ago, Bird said:

Agreed but the flip side is that you might want to give one of these folks an allocation.  Yes you can do an -11g amendment but since most of our plans are using a safe harbor nonelective they are already getting something so the coverage test is not a concern.  We've dropped allocation conditions on most of our everyone-in-their-own-group plans.

I agree that if you have a safe harbor non-elective plan then a last day condition is not helpful. Worse than useless really, since it can force you to do an -11(g) amendment in some cases which will possibly require that you grant additional vesting.

My experience has been that while giving an allocation to a terminated employee might sometimes be helpful to pass testing, most employers would rather pay more to one of their current employees than give a contribution to somebody who left if they don't have to. That's not always the case, so always discuss it with the client before you decide on any plan provisions.