Top Heavy Contribution

[DP]

We have a SH 401k cross tested plan with age 21/1 year entry into the PS portion. The 401k allows entry after 3 months of employment. The plan is written where the 3% non-elective safe harbor contribution will only be given to participants who have met the age 21/1 year eligibility.

The plan is top heavy. Do the early participants in the 401k have to receive a top heavy contribution if they are not yet eligible to participate in the employer contribution?

[Mike Preston]

Yes.

[DP]

Does this mean the early entrants will also have to receive the gateway allocation for a total of 5% employer contribution (3% SH and 2% ER)?

[Mike Preston]

No.

[Tom Poje]

Mike is apparently short on words at the moment. Must be the college football seaon, and those Wolverines have him next to speechless!

[Guest merlin]

Mike- This question was asked at the NE Area Benefits Conference in June and the and given by Ken Aufsesser,with Dick Wickersham nodding in agreement,that as long as ps portion could pass the ratio % test without the early-ins they didn't have to be given the gateway.If the abt had to be used,then they did. This is somewhat more restrictive than your answer. Further, I was told that at the ASPA Summer Academy ( Iwasn't there) Jim Holland said that if they got anything, they had to get the gateway.Period.

Obviously,I like your answer best. But just as obviously there are are different opinions.I think Ken's answer was based on the rules of application for multiple age and service requirements in 1.410(B)-6(B)(2) and (4).Care to share your reasoning?Thank you.

[Tom Poje]

in the Federal Register (vol 66, no 126, June 29,2001, page 34536) in the explanation of provisions, it is clearly stated

"...if a plan benefits employees 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 and one for the other employees benefitting under the plan. Thus, if (I would read that as IF and ONLY IF) the plan is treated as two separate plans in this manner, cross testing the portion of the plan beneifitting the nonexcludable employees will not result in minimum required allocations under the gateway for the employees who have not met the section 410(a)(1) minimum age and service requirements."

[Guest merlin]

Ok,Tom,but doesn't each of the disaggregated plans have to pass coverage on its own? If so,does the manner of passing,i.e.,rpt or abt, have a bearing? This would seem to support Ken Aufsesser's answer.

[Mike Preston]

I don't see anything which supports the "if you use the ABT, then the gateway must be provided to all plans" position. Unlike 416, which has a clear reference in the regulations, IIRC, to the fact that if a plan is used to support another plan under 410(B) it is part of a required aggregation group, there is no corresponding provision for the gateway. Furthermore, if you use the ABT, you can (must?) exclude those under 21/1 from it! The logic for that has been previously posted a number of times, and even the IRS now agrees to it, I believe! So all roads point to exactly the opposite.

I was at the ASPA Summer Academy. I didn't hear Jim state that the gateway had to be provided to those under 21/1 if the plan was tested separately with respect to excludables and non-excludables. He certainly didn't say it while he and I were on the podium together in the final session.

The preamble is about as clear as it can be, IMO. Thanks, Tom.

[2muchstress]

I believe this was also covered in an ASPA webcast which supported Mike's answer. You may wish to check the ASPA home page and review the webcasts. I believe Joan Gucciardi was the presenter.

[Guest merlin]

Ok,Assuming I can disaggregate the otherwise excludables I don't have to give them the gateway until they satisfy the 1-yr eligibility for the ps contribution.

Now a slight variation. Assume the same conditions as above, but add a subset of employees who are eligible to make deferrals but who are excluded as a class from the ps. Once they've passed the 1-yr threshold will they have to be brought up to the gateway? Are they now benefitting under the ps portion of the plan? Or are they considered as benefitting under the "k" portion of the plan ,which is subject to mandatory disaggregation except for the avg. ben.% test.So if the ps portion can pass the ratio % test without them they can stay at 3%?

[Mike Preston]

If the plan is top-heavy, and they get 3%, then they are:

1) not statutorily excludible

2) getting an allocation of greater than zero percent

right?

If so, they must get 5% (actually, they must get the gateway, which might be less than 5%).

Unless they are in their own standalone plan.

If they are, then the rest of your analysis is on point. That is, if they stand on their own and don't need to be aggregated with another plan that is cross-testing, then no gateway is required.

[Guest merlin]

Got it. Hallelujah!Thank you.Now go back to bed!