Testing a 401(k) plan with multiple eligibility requirements

[Guest]

Previous threads have dealt with the issue of"carving out' otherwise excludables from the various nondiscrim tests,but what about plans with multiple eligibility provisions? Specifically ,I have a 401(k) plan that requires 21/1 month for deferrals,and 21/1 year for the PS.The PS allocation is tiered, and there is a 1000 hr/last day requirement to get an allocation. The plan is top-heavy,so the 1-monthers get the 3% minimum.How are these folks considered for ratio%,average benefit,and general tests? Thanks for your help.

[Guest]

the top heavy rules came out long before 401(k)s came into vogue, so I don't think the regs are really clear how to handle things, so some observations:

1. Supposedly some administrators have gotten plans approved which have immediate eligibility for deferrals, 1 year wait for profit sharing - and that includes top heavy contribtuions. There seem to be some basis established for this in the safe harbor 401(k) plans, because the 3% nonelective can have a 1 year as well. This would seem to read the top heavy rules as saying 'all active non key participants in the plan' to mean just the 401(a) portion of the plan. Obviously this does not apply to your plan, but something to muse over.

2. You could always test the plans using the otherwise excludable rule (those with 1 year/age 21) if plan passes I guess you would be happy and be done.

3. If step 2 fails, then I suppose I would think of my plan as being tiered with an extra unexpected tier. e.g. Owners, non owners with 1 year of service, those who had less than 1 year but received a top heavy contribution. And then test everything aggregated.

Under coverage testing, ees who receive a top heavy minimum are treated as includable and benefiting for the non elective contribution - after all they did receive an allocation.

[jaemmons]

The "one monthers" would be treated as follows:

1) Ratio % test- mandatory disaggregation applies, so they would be included in the 401(k) coverage test, but since they do not meet the elig. requirements under the PS piece, they are excludable.

2) Avg Benefits Test- It depends on whether the employer wishes to carve out the "otherwise excludable" ee's (1 mos.). If they do, then avg benefit %'s are based upon only those plan participants who would have met the 21/1 yr statutory maximum, as of the plan's latest entry date. Here everyone who has met the 1 mos. requirement to defer but would not have met the 1 yr under IRC 410(a)(1)(A) is not included. If they do not "carve" out these participants, then ALL employees must be taken into account in determining the ABP's for the plan. Please keep in mind that you must test both groups separately.

3) General Test- Since you are testing for nondiscrimination with respect to the ER PS $'s, the EBARS are only determined for those nonexcludable ee's using the plans's 21/1 yr elig requirement. Even though the 1 mos are required to receive a T/H minimum, they are not included in the general test. However, if the rate groups do not pass the ratio % test, the determination of the Avg Benefits test is based upon the calcs in #2 above.

I don't agree with Tom Poje, regarding T/H minimums. It depends upon whether the plan is designed to satisfy one of the safe harbor allocation methods under Reg. 1.401(a)(4)-2 or is demonstrating non discrimination testing under Reg 1.401(a)(4)-8 and whether or not the plan is using the ratio % test or avg benefits test to satisfy coverage. Just because someone is receiving a T/H min does not necessarily mean that they are "benefiting" under the plan.

[Guest]

My basis for comments on top-heavy comes fro:

1. Schedule T instructions: line 4c(5)

in general, an employee is 'benefitting' if the eployee receives an allocation of contributions....certain other employees are treated as benefitting even if they fail to receive an allocation solely because...

2. The ERISA Outline Book 2001 edition

page 9.23 section 5.d.4 Actual coverage testing is not affected under top heavy plan exception. we emphasize that this rule described above is solely for purposes of determining whther the existence of a separate top heavy allocation formula causes the plan to fail to be a safe harbor plan under 401(a)(4). for actual coverage testing, which is reported on the Form 5500 series return, an employee IS treated as benefitting, even if the allocation is due to the application of the top heavy rules.

[jaemmons]

For this specific plan, I agree that the T/H mins would be counted in determining whether or not the plan satisfies coverage, because it is not a "safe harbor" plan, as outlined in Reg.1.401(a)(4)-2. However, the group of employees to be included would depend upon whether or not the employer is electing to disaggregate and test the "otherwise excludable" ee's separately. In any event, the plan presumably would have to satisfy the avg. benefits test anyway, if the rate groups under the general test don't satifsy the ratio % test, based upon EBAR's, so the t/h mins would be included here anyway.

However, for plans that wish to satisfy nondiscrim testing under Reg. 1.401(a)(4)-2, the plan must count those who receive t/h mins only as "not currently benefiting" and pass coverage testing, in order to illustrate that the formula is considered a "safe harbor" allocation formula. Since this is not one of those plans, then the rate group testing applies. I agree with Mr. Poje's comments, but the design of the plan's allocation formulas dictates how the plan passes coverage, with respect to those who receive t/h minimums only.