Testing comp for Top Heavy plan

[dmb]

I have a Cross Tested PS plan that defines compensation for allocation purposes as comp while a participant. The plan is also Top Heavy. The Top Heavy definition of comp is for the entire plan year. If a partipant's Top Heavy allocation is greater than his plan formula allocation, which compensation is used for testing?? Thanks.

[jaemmons]

You must first satisfy any top heavy minimum based upon full compensation. If it is greater than the allocation for their class, it is still used for general testing purposes. Problems arise when, and this doesn't happen too often in the small business market where top heavy is more visible, you have a nonkey HCE who has to receive a th min, since their EBAR is increased.

As far as compensation for general testing, you can use the participation comp, even with the new cross testing regulations.

[dmb]

Thanks for the quick response. I understand that i have to use the top heavy contribution if it's greater than the plan allocation. I'm also aware of the non-key HCE problems. I just want to confirm that i can use compensation from date of participation for testing when someone who enters in the middle of the plan year receives a top heavy contribution based on full year's comp. Thanks.

[AndyH]

Yes, you can either use full year or from date of participation. Either way is acceptable for testing.

[Richard Anderson]

Does the document address this? I have seen some documents that specifically define compensation used for testing.

In documents that do not specically address the definition of testing comp., but do have a general definition of comp.; we have been using that definition for testing also. Maybe, we should not be doing that.

AndyH, if the document doesn't define testing comp, but has a general definition of compensation that is plan year compensation; do you think that it is OK to use comp from entry for testing.

[AndyH]

Yes. 1.(401)(a)(4)-8(B)(2)(i) defines the EBAR as the increase in the balance divided by years benefitting, expressed as either a dollar amount or a percent of average annual comp.

Average annual comp is defined in 1.401(a)(4)(3)(e)(2) and in subsection (ii)(A) it says Plan Year comp may be substituted for average annual comp if the measurement period is the current plan year.

Plan Year comp is defined in 1(401)(a)(4)(12), which says that Plan Year comp means section 414(s) comp during one of the periods described further in (2)-(4), and (4) says you can use comp during the period of participation.

So, it looks like this is limited to the annual method, and it also appears that comp must be plan year comp (measured during the plan year), not another 12 month period. But, I think it's clear you can use any definition of comp that satisfies 414(s), including different definitions for different disaggregated component plans if applicable.

But Richard's point about checking the document is a good one; sometimes the document does state the methodology.