Bringing Back Termined EE to Pass Coverage

[Guest Cyndy]

I have new Money Purchase, 18.75% (so owner can get full $30,000). 1000 hours and last day employment required for contribution. Co. had owner and 4 NHCE, 3 of which are parttime and are not eligible yet, the 4th of whom terminated with over 1000 hours service. We bring back the terminated EE to pass the coverage test.

QUESTION: Does the person brought back require the full 18.75% contribution, or only the 3% Top Heavy minimum???

[Larry M]

What does the plan document require?

If all eligible particpants get 18.75%, then this individual gets 18.75%. If the plan is one which allows contributions to vary by class, then the individual gets the contribution required of that class.

...or the plan could be modified to allow part time employees to get a benefit.

[LCARUSI]

This is a follow up to Larry M's comments.

If the Plan is a plan which allows different contribution levels by class, then the Plan would be subject to general testing under 401(a)(4). So if you want the plan to provide 18.75% to "senior management", i.e. the owner, and 3% to everyone else, you'll probably be unable to satisfy 401(a)(4).

P.S. I really like Larry's idea to give benefits to part time employees. Whether it would help in this particular situation will depend on relative salary levels among the employees, but it's an idea I'll keep in mind in the future.

[Dave Baker]

Re Larry's question about the plan document ... would this be a situation described in the 401(a)(4) regs where the plan can fix a minimum coverage problem by expressly amending the plan to broaden the coverage (rather than just depending on some fail-safe language in the plan)? (I seem to remember 10-1/2 months as the deadline.)

If so, I'd think the remedial amendment could not only expressly waive the last-day requirement but could carve out a class (non-HCEs, what the hey) and say that persons in that class for a particular plan year get only 4.578% (being the minimum percentage allowed after running some cross-testing software to find the magic minimum for that particular plan year).