Who gets a 5% contribution?

[Jeff Kirtner]

Under the minimum contribution gateway test in the final regulations, NHCEs must receive a 5% minimum allocation if the plan is to be allowed to cross test. The preamble makes clear that an NHCE is a kind of "employee," and that an individual is an "employee" only if, among other things, the individual is "benefiting" under the plan. Are employees who get a top heavy contribution of 3%, but no other contribution (because, for example, they do not have 1000 hours of service during the plan year) considered to be "benefiting," and thus must receive a 5% contribution in order for the plan to cross test?

[Tom Poje]

Maybe. That is a good cop out answer, isn't it.

I think it depends on whether you can pass 410(B) without the top heavy group or not. but I am not 100% sure, so these are just my thoughts. I guess by the end of 2002 we will probably know a lot better.

In the Federal Register comments (vol 66, No. 126) there are some comments on whether a plan satisfies broadly available allocation rates. One group of NHCEs receives 10% and another group receives 3%. (I am assuming the 3% group is top heavy)The final regs permit two allocation rates to be aggregated in a manner similar to the rule that permits aggregation of certain B,R,F. This rule permits excess NHCEs with a higher allocation rate to support a lower allocation rate - if the 10% group satisfies section 410(B)[w/o regard to the average benefit percenatge test].

There is also logic that says, or would seem to be similar to the idea for schedule T you treat all ees as includable and benefiting, but to be considered 'safe harbor' you treat the top heavy group as includable and not benefiting and see if you pass 410(B). thus the top-heavy people are 'not benefiting'.

I think you have to be careful about the logic that is used. In your case, you have an ee who has less than 1000 hours and wouldn't normally receive an allocation. That seems to be clear cut. This is different that saying, all NHCE receive 0, oh, the plan is top heavy so I have to give them 3% top heavy.

[KJohnson]

Tom, I just got asked this exact same question. Anyone care to follow up on the following to scenarios assuming a plan has a last day/year of service requirement for the cross-tested contribution and wants to use a 5% gateway.

1) Are non-keys in a top heavy plan who don't have 1000 hours required to receive 5% or 3%.

2) If you are using a safe harbor 3% NEC in addiiton to a profit sharing contribution are those just entitled to the safe harbor NEC actually entitiled to a 5% contribution?

My off the cuff response to 1) was the same as some of Tom's thoughts, if you pass 410(B) without including the non-key's entitled only to a top heavy contribution then you can give only 3%?

Any thoughts.

[KJohnson]

Thinking about this some more it seems that you only disaggregate the top-heavy under 410(B) to see if you pass a safe harbor under 401(a)(4). For general 410(B) coverage they are still included as benefitting. The cross-testing regs send you back to 410(B) to see who is benefitting under the Plan.

So does this mean you automatically have to "nix" a 1000 hour of service rule in a top-heavy plan in order to pass the 5% gateway?

[AndyH]

Joan Gucciardi has stated that any 3% (or 1% or 2% for that matter) must be increased to 5% if any HCE receives 15%.

Her ASPA conference outline on page 14 in part states "Accordingly, the regulation tells us that each NHCE who receives any allocation at all must receive an allocation equal to at least the minimum allocation gateway. "

The 8th Q&A from her post-Webcast notes relates to the 3% SHNEC as follows:

Q: "If you have a safe harbor 401(k) that has a last day requirement to receive the employer profit sharing contribution are you required to increase the 3% nonelective contribution to 5% for NHCEs who have terminated employment?

A: Because they are entitled to a 3% nonelective contribution, such NHCEs must be increased to 5%."

Here's a link to the post webcast Q&A's.

http://aspa.org/archivepages/conferences/2...p/questions.htm

[KJohnson]

Thanks for the link Andy H--good stuff

[Disco Stu]

I was reading the ASPA Q&A doument that Andy linked & wanted to clarify a point. From question 6, their position appears to be that a non-key participant who is only entitled to a top heavy minimum would not need to receive the gateway contribution.

There seem to be conclusions to the contrary in some other threads on the message boards, stating that non-keys who were only entitled to a top heavy minimum needed to be bumped up to the gateway level.

Does anyone have any cites that cast ASPA's opinion (or my reading of it) in doubt?

[Mike Preston]

It only applies to those that could have been set up in a separate plan due to relaxed eligibility criteria. It does not apply to all non-keys.

[AndyH]

Mike, would you please clarify your statement. What is the "it" that you are referring to? Are you referencing otherwise excludables?

[Mike Preston]

I am referencing the ability to provide a positive contribution to certain participants (otherwise excludables) who nonetheless do not need to receive the gateway percentage. The regs are crystal clear that one may avoid the gateway for those individuals even though they are provided benefits through the same plan that non-excludables participate in. Similarly, the regs are crystal clear that if a participant is not otherwise excludable they must receive the gateway if they receive anything in excess of zero.

[Belgarath]

It seems as if there are at least a couple of different situations to consider.

1. Suppose you have a cross tested PS plan only. Further suppose that you have a couple of participants who dropped below 1,000 hours, so are not eligible for a "regular" allocation of the employer contribution, but are eligible for a top-heavy minimum. Must they receive a Gateway contribution?

It seems to me that they must, as under 410(B)-3, they are employees benefitting under the plan if it is a DC plan (not a 401(k) or (m)) and they receive an allocation taken into account under 1.401(a)(4)-2©(2)(ii). A top heavy contribution is not excluded under 1.401(a)(4)-2©(2)(ii). So although they do not receive a "normal" cross tested allocation, they must receive Gateway. And by the way, some people assume that Gateway is 5%. Although in reality it usually works out that way, it is actually the lesser of 5% or 1/3 of the highest allocation to a HC.

2. If you have a combined 401(k)/cross tested PS plan, where employees are eligible under the 401(k) portion, but have not satisfied eligibility for any employer contribution in the PS portion.

Now this situation is different. Since 410(B)-7 provides for mandatory disaggregation, then it seems that no Gateway contribution could be required for the PS portion of the contribution for those employees who were excluded. If there were participants who were receiving a top heavy minimum in the PS portion, then they would have to receive Gateway.

[Fred Payne]

I'm confused on a few points (more or less a permanent condition!)

Assume plan is a cross-tested, Safe harbor 401(k). 3% SHNEC is elected. Immediate eligibility for the 401(k) but 1 YOS and Age 21 for (a)(4) contribution. Allocation requirement for (a)(4) is 1,000 hours and last day of year employment. Assume my allocation groups are HCEs and NHCs. Let's further assume the Plan is NOT top-heavy and even if it was, no participant would have had to get a top-heavy contribution.

I'm confident that the Ratio Percentage Test is limited to the 3% SHNEC and the (a)(4) Contribution. From my reading of Belgarath's post, my coverage group for this test would exclude those who failed 1 YOS and Age 21 even though they are participating in the 401(k). But what of a previously eligible participant who was terminated in the testing year? Do I include them because they were benefititng under the 401(k)? I think so, but at most do they only get 3% SHNEC even if my cross-test demands a 5% Gateway contribution?

Let's say I fail the Ratio Percentage Test, and I'm forced to perform the Average Benefits Test. Is my coverage group for the ABT the same as it was for the cross-test? "Yes" is the easy answer, forcing me to only make certain that those eligible for the 401(k) but failed 1 YOS and Age 21 get the 3% SHNEC.

But if I include in the ABT everyone who was eligible for the 401(k), and the cross-test demands a larger (a)(4) contribution to the NHC group to pass, do I only give the larger (a)(4) to the (a)(4) eligible?

Do my Rate Groups include this expanded coverage group for determining passing the Nondiscrimination Class Test, a prior condition for performing the ABT?

[Mike Preston]

Lots of questions...little time....but....

Yes, if someone is not an excludable amployee and they benefit, then in your example they must get 5%. Those who at one time satisfied 21/1 and who terminate are not excludable for this purpose.

But if I include in the ABT everyone who was eligible for the 401(k), and the cross-test demands a larger (a)(4) contribution to the NHC group to pass, do I only give the larger (a)(4) to the (a)(4) eligible?

I admit that I don't have a clue what the above is stating. A larger contribution under a4 to pass the ABT? If so, you need to give it to somebody. Anybody. You want to give it to the a4 eligible? Fine. You want to give it to the k-only eligible? That's ok, too. Who do you want to give it to?

Do my Rate Groups include this expanded coverage group for determining passing the Nondiscrimination Class Test, a prior condition for performing the ABT?

If you have decided to do a single ABT with not only those who satisfy the 21/1 requirement but also those who do not, then you have a single group. Or am I misunderstanding your concern?

[Fred Payne]

Let's say same assumptions about plan specs but add that the number who satisfy allocation requirements for (a)(4) number 20 and those who have not yet met 1 YOS and Age 21 number 10.

All 30 benefit under the SH 401(k) and receive the 3% SHNEC. That's clear.

When testing my (a)(4) allocation, I'd hope my coverage group would just be the 20. From what you wrote, I assume this is correct. If I had 3 HCEs out of the 20, I would perform the Ratio Percentage Test on just 3 Rate Groups. If all 3 Rate Groups pass the Ratio Percentage Test, I think I'm done with my testing.

What if one or more of the Rate Groups fail the Ratio Percentage Test? I must then undertake the Average Benefits Test. This is where I have my questions about coverage. Each Rate Group must pass the Nondiscrimination Class Test before conducting the ABT. Am I using the same coverage group as I did with the Ratio Percentage Test, i.e. 20 participants? Or do I now bring in all 30? To pass the Nondiscrimiation Class Test, I might have to decrease my allocations to the HCEs or increase them to the NHCs. If I choose the latter, do I only give an increase to the 20 or am I now testing for the 30 because the Nondiscrimiation Class Test is the first step in passing the ABT?

If each Rate Group passes the Nondiscrimination Class Test, I can perform the Average Benefits Test. What is the coverage group for the ABT: 20 or 30?

From the postings I have read lately, it seems that the Gateway requirements can increase the top heavy contribution to 5% when in other plan designs, the top heavy would remain at 3%. The essence of my question is does a failure of the Ratio Percentage Test of the Rate Gropus force a similar increase to 5% for those participants who otherwise would only have been eligible for the 3% SHNEC?

If in all calculations of the cross-test of the (a)(4) I limit consideration to the 20, then I'm a happy camper.

[Tom Poje]

you did not indicate if you are testing 'otherwise excludables' seperately or not.

The 'explanation of provisions' in the Federal Register says:

..'for example, these regulations do not change the general rule prohibiting aggregation of a 401(k) plan or a 401(m) plan with a plan providing nonelective contributions.'

A safe harbor is still a nonelective contribution, so I see no way out of excluding that from (a)(4).

furthermore, the Register goes on to say

'if a plan benefits employees [someone who receives a SHNEC benefits] who have NOT met the minimum age and service requirements of section 410(a)(1), the plan MAY be treated as two seperate plans, one for those 'otherwise excludable employees...'

from that statement, I think you are stuck with 30 employees, unless you actually seperately test.

I guess that makes sense.suppose you had two 'profit sharing plans'. one with immediate eligibility that provides the SHNEC and the other plan a one year wait that provides discretionary. how would you test? you have to use the eligiblity with the least stringent requirements.

[Mike Preston]

Man, this is getting confusing.

Fred, I agree with Tom that it depends on whether you are testing separately under 410(B). If you are, then your testing group is 20, for all purposes. You do NOT increase from 3% to 5% any of the group of 10 just because you use the ABT on the other 20.

Tom.....

A safe harbor is still a nonelective contribution, so I see no way out of excluding that from (a)(4).

Huh? SHNEC contributions do triple duty: a4, k and TH, don't they?

I guess that makes sense.suppose you had two 'profit sharing plans'. one with immediate eligibility that provides the SHNEC and the other plan a one year wait that provides discretionary. how would you test? you have to use the eligiblity with the least stringent requirements.

Huh? Why wouldn't I be able to separate the entire group into two separate groups? One that meets statutory eligibility and one that doesn't?

[Tom Poje]

Mike:

my comments were that

1) you have to include the SHNEC in a(4) testing. I was making no comment in regards to it (not) performing triple duty. simply to say that it is still a nonelective contribution and therefore included in that type of testing.

2) My comments were in regards to if you did not seperately test the 'plans' (meet statutory and doesn't meet)

.............

I guess a reminder, if seperately tested, then coverage must also be done seperately.

[AndyH]

Well, to interject for a moment, now what was the consensus: Are there or are there not two average benefits percentage tests if we separately test excludables, and if there's one, who is in it?

Isn't that what Fred was asking, or have I gotten totally confused?

[Mike Preston]

Tom, my reading of "no way OUT of excluding it from a4" was exactly opposite of what you meant! Now it is clear, so thanks for the clarification.

Andy, isn't this the same issue that comes up every once in a while? I know I wrote a long message about this a while back. Do you still have it? This issue is the one that has been addressed by the IRS from the podium in recent years, and they started off with the incorrect interpretation and have since modified their position. That is, if you test 410(B) separately, you have two ABT tests.

But I don't have time to look up my old message today. Maybe somebody else can?

[Tom Poje]

Mike:

at least if you watch the Red Wings you don't have to stay up until 1:45 in the morning! I guess they are showing there is hope for 'old-timers' like me.

have a great day!

[Mike Preston]

Try this:

http://benefitslink.com/boards/index.php?showtopic=12907

[Guest lforesz]

Hi,

Hard to remember all the rules and panicking a bit. An employer has two plans that each pass coverage on their own. One plan is cross-testing and each NHCE who receives an allocation receives the 5% Min GW contribution so that HCEs can maximize at 14.5%.

The other plan is also cross-tested, but the maximum HCE only receives 3%, so each NHCE gets 1%.

I hope the employees in the other plan don't need to be bumped up to 5% just because an HCE is the other plan gets 14.5%. This all gets very confusing. Please help!!!!

[Mike Preston]

If the two plans stand on their own, and are separate documents, the 1% contribution satisfies the gateway, the way I read the regulations.

[Guest lforesz]

Hi,

That's what I was really hoping. When I run the (a)(4) test, the 1% NHCEs in the other plan, show up in the rate group test even though they are not benefitting under the 5% plan. Does that seem right to you? I agree they would be in the ABT, but I didn't think I would see them in the (a)(4) test. What do you think?

I really appreciate your insight.

[Mike Preston]

If the two plans are being tested separately, then the plans are tested separately. It sounds like you are running a test where the plans are not being tested separately.

[Belgarath]

Hi Mike - are you sure about this? The regs are a bit confusing. 1.401(a)(4)-2©(2) provides that only employer contributions and forfeitures under the plan being tested are taken into account to compute the EBR's. However, when computing the average benefit ratio test under 1.401(a)(4)-2©(3)(iii), it provides that a plan satisfies the average benefit ratio test if the plan of which it is a part satisfies 1.410(B)-5. Which means that the plan has to apply the average benefits test as if you were doing a regular coverage test. I understand this to mean that you are required to include contributions or benefits from all plans maintained by the employer that are part of the testing group that includes the plan being tested. I'm not sure I'm conveying this lucidly, but what I come out with, having to take into account 1.410(B)-5, is that you do have to include the other plans for EBR testing in each plan. This seems to make some amount of sense where you have a cross-tested and a non cross-tested plan. But I've never had to consider how to apply it with two cross-tested plans of the same employer...thankfully I've never seen such a situation!

[Mike Preston]

Pretty sure. If one tests by combining the EBRs then one must, per the gateway rules, provide a gateway based on the entire group. Since the gateway regs make it clear you don't have to do that, there must be a mechanism for using EBR's of a subset.

[Belgarath]

I think we may be agreeing, but I'm just stating it badly. Yes, you can test as stand alone. However, if you end up having to use the average benefits test in order to pass, part of the average benefits test requires aggregating the benefits and contributions of all the plans of the employer. And this might screw up your results from the stand alone testing. Or is this not at all what you are saying? Thanks!

[Mike Preston]

Combining plans for ABT testing does not in any way imply that one must combine the plans for gateway testing.

[Belgarath]

Got it. Thanks for clarifying this - I was going off on a tangent, instead of looking at the actual question. I have a tendency to do that...

[Guest Keith N]

Just to bury this dead horse (since it's already been beaten into the ground)...

Let's say I have a SH401(k) and I'm allocating 3% to all eligible employees. I also have a cross-tested PS allocation and I'm using the 5% Gateway. Eligibility is 21/1 and I have a 1000 hour and Last Day rule to receive an allocation.

One of my employees terminates before completing 500 hours. Because she is "benefiting" (3% 401(k) SH), she will not meet the definition of "excludable" under 410(B)-6(f), and therefore she must get the 5% gateway.

Is that correct?

[Blinky the 3-eyed Fish]

Yes.

[Guest merlin]

For anyone who did not attend the ASPA conference, here is the answer from the IRS Q&As. Unfortunately it was in the group of questions that was to be discussed from the podium and they never got to it.

"The regulations suggest that any participant who is eligible for a contribution that could be permissively aggregated under 1.410(B)-7(d) ( ratio percentage test) must receive the gateway minimum. That would mean (for example) participants in a top heavy plan who are not entitled to the employer cross tested contribution, because they have less than 1,000 hours,would have to get the gateway minimum, because the top heavy contribution could be aggregated with the cross tested contribution under 1.410(B)-7(d) (assuming that the plan otherwise meets the 410(B) requirements). This would also be the case if the top heavy minimums are provided under a separate plan than the one providing the cross tested allocation.

However,if the top heavy contribution is made to a separate plan and the plans have different plan years, the participants would not have to receive the gateway minimum, due to 1.410(B)-7(d)(5),which prohibits the aggregation of plans with different plan years for purposes of the ratio percentage test."

I think this says (indirectly) that those participants who are getting the t/h minimum as a result of their participation in the "k" portion of the plan don't have to get the gateway because the "k" cannot be aggregated with the ps portion.

Anyone? Anyone? Bueller? Bueller?

[Guest merlin]

For anyone who did not attend the ASPA conference, here is the answer from the IRS Q&As. Unfortunately it was in the group of questions that was to be discussed from the podium and they never got to it.

"The regulations suggest that any participant who is eligible for a contribution that could be permissively aggregated under 1.410(B)-7(d) ( ratio percentage test) must receive the gateway minimum. That would mean (for example) participants in a top heavy plan who are not entitled to the employer cross tested contribution, because they have less than 1,000 hours,would have to get the gateway minimum, because the top heavy contribution could be aggregated with the cross tested contribution under 1.410(B)-7(d) (assuming that the plan otherwise meets the 410(B) requirements). This would also be the case if the top heavy minimums are provided under a separate plan than the one providing the cross tested allocation.

However,if the top heavy contribution is made to a separate plan and the plans have different plan years, the participants would not have to receive the gateway minimum, due to 1.410(B)-7(d)(5),which prohibits the aggregation of plans with different plan years for purposes of the ratio percentage test."

I think this says that those participants who are getting the t/h minimum as a result of their participation in the "k" portion of the plan don't have to get the gateway because the "k" cannot be aggregated with the ps portion,which appears to correspond to the idea of disaggregating the otherwise excludables. But the notion of a 2nd plan with a different year comes out of left field.

Anyone? Anyone? Bueller? Bueller?

[Guest lforesz]

Hi,

It the person is only eligible for the k portion, then I think you would be correct. But, if they must get a top heavy, then it sounds like they would need the gateway ctb because the top heavy can be aggregated with the Profit Sharing ctb. How about if the person is not yet eligible for the PS (due to length of service ) but gets a top heavy minimum. I would think they would need the MAG as well. I realize they are not benefitting under the profit sharing portion, but since the top heavy minimum can be aggregated with the PS, I suppose we are stuck giving it to them as well.

Anyone??

[Tom Poje]

Lori:

see my comments on page 2 of this thread.

if the person has never completed a year of service, then you would not have to increase the person to the gateway, but only if you test the plan as two separate plans -those that met statutory exclusions and the otherwise excludables.

[AndyH]

Yesterday at ASPA's closing session Sal Tripodi specifically addressed this (Keith's) question, and said it is the subject of an imminent ASPA ASAP.

Yes, these people need to get the 5%, unless, as Tom correctly points out, they can be disaggregated for age and service (although Sal Tripodi did not say that). He was referencing somebody who did not get more than 3% on account of an hour or last day reqirement.

He recommends a separate allocation class consisting of people eligible only for the SHNEC. Then give them an extra 2% if needed.

I do find it interesting that he said nothing about limiting this group to people who meet the 21/1 year standard, however.

[dmb]

I have a top heavy cross tested ps plan, no 401k plan. The low class is getting 8% of comp to max out owners. There is one participant in the lower class who did not work 1000 hours. After reading prior posts, i'm still a bit confused. Does this participant have to receive 8% of comp allocation or can they receive only the 5% gateway?? Thanks.

[Tom Poje]

the person who received the top-heavy 3% is considered benefitting, therefore he must be kicked up to 5% to satisfy the gateway (but not the 8%).

perhaps you could think of it this way.

cross testing is converting a DC contribution to a DB benefit.

so, you sort of like have a DB/DC combo plan.

Now, what is the top heavy minimum in a combo plan? lo and behold 5%! hey there is method in the government madness.

of course, things can get real strange.

suppose you have a calendar year plan and ee works 1000 hours, enters 7/1, and definition of comp is based on date of entry.(def of comp is also comp - bonus)

the person then gets either 3% top heavy based on full year, or 5% gateway based on total comp from date of entry or 8% of comp - bonus

[Blinky the 3-eyed Fish]

Keep in mind, though, that your document must allow for the person to get only the gateway.

[dmb]

Ok, now we're getting somewhere. plan will pass the rate group and avg. bfts test. What you're saying is that if there isn't a separate class for "top heavy minimum only" participants, anyone who works less than 1000 hours and entitled to the top heavy minimum would have to get the 8% rather than the 5% gateway.

Thanks.

[Blinky the 3-eyed Fish]

Andy, whether or not the person has to be in their own class depends on the wording of the document. Our documents have language that is like the provisions for top heavy. In other words, there's wording that kicks the benefiting party up to the minimum gateway amount. In fact the way our documents are worded, the person could not get the 8%, because he didn't satisfy the accrual requirements for it.

[AndyH]

Blinky, good point, and very good idea.

[dmb]

Along the same lines, i have another question. Where do forfeitures fit into the gateway minimum. I have a plan with one HCE and a handful of NHCEs. the NHCE gets $7,000 in forfeitures so his PS alloc is $33,000, which based on $200,000 of comp is 16.5%. the forfeiture alloc is 3.5%, which is the same for everyone receiving an allocation. The gateway would be 5% (assuming plan passes non-discrim testing). Are the forfeitures included in that gateway minimum or is the 5% on top of the forfeitures?? Thanks. The plan is not Top Heavy, let's not go there this time.

[Guest PLHart]

I believe the total p/s allocation (which would indeed include forfeitures) is used for all x-testing purposes including minimum gateway requirements --

I also need to clarify how this thread pertains to a case I am currently working on...

If I have two separate plans of a single employer, a one year eligibility 401(k) and a two year eligibility new comp p/s, and they are top-heavy, must participants who receive their top-heavy minimum contribution via the 401(k) plan (those with one year of service but less than two) also receive the minimum gateway contrib (as they would if it were one plan)? Please help...

[dmb]

so even though the employer is contributing over 15% for the HCE, as long as the total allocation for each NHCE is at least 5% the plan's ok???

[Blinky the 3-eyed Fish]

PLHart, the answer to your question depends on whether you are aggregating the plans for coverage and nondicrimination testing. If aggregating, then the gateway would need to be provided to those participants that got a top heavy minimum.

Dmb, for purposes of rate group testing and the gateway requirements forfeitures allocated are no different that nonelective contributions. In answer to your last question, yes, your plan would satisfy the gateway requirements. However, it still would need to pass the general testing to be ok.

[AndyH]

So, the second plan concept is obviously dependent upon separate testing for 401(a)(4) and 410(B), and presumably satisfying top heavy in a second plan does not somehow require you to aggregate for 401(a)(4) and 410(B). I guess that is right.