Top Heavy & the Cross-test

[Fred Payne]

Plan Year end 2001. Plan is Top Heavy and cross-tested. Contribution to NHCs is 3%. NHC Jones enters plan mid-year & thus is entitled to 3% top heavy based on full year comp.

Q1. When doing the cross-test, I include full year comp in calculation of EBAR. Correct?

Q2. Assume same scenario except contribution to NHC is 8%. NHC Jones gets 8% of 2nd half comp and I only include 2nd half comp in calc of EBAR. Correct?

Thank goodness there are a lot of people a heck of a lot smarter and more experienced than me!!

[Tom Poje]

Fred:

ignore the issue the plan is top-heavy for a moment.

think about the following.

When you allocate a contribution is it based on 414(s) compensation? It could be, but it doesn't have to be. Therefore, in a typical plan with two entry dates, you could base your contribution on comp for the whole year. But for testing purposes I am allowed to use one of the definitions of plan year compensation found under 1.401(a)(4)-12 definitions-->plan year compensation. and one of those definitions (#4) allows you to use comp from date of participation. As long as you treat all employees the same way.

In effect, in a top heavy plan, this will 'double' an E-BAR. And obviously help in testing.

I suppose the catch is the last sentence 'selection of this period must be made on a reasonably consistent basis from plan year to plan year in a manner that does not discriminate in favor of HCEs.'

I have never seen this last point raised in any discussion, simply that you can use comp from date of participation for testing purposes. In fact, I have seen someone suggest making the entry date the last day of the plan year (Ha, use 1 day's worth of comp for testing purposes!) Now that would blatantly favor HCEs and I wouldn't try it. But a typical plan with two entry dates, I don't see a problem. Maybe its a trade off...if the plan wasn't top heavy, you wouldn't have given the person as large a contribution, so you are getting something extra in return.

By the way...

Have fun in 2002! conceivable you can have the following:

NHCEs get either 3% total comp if plan is top heavy

5% of 415 comp from date of participation or

1/3 rate of HCE based on plan definition comp (e.g. plan definition of comp might exclude bonuses, commisions or something)