Can you allocate just a 3% top heavy contribution to a cross tested pl

[Guest Julie Woulfe]

Plan's cross tested formula is such that if the employer contributes just a 3% top heavy minimum to everyone, it does not pass ratio test (there is a new, very young HC participant). Does that matter, since everyone is getting 3%?

[Dawn Hafner]

I assume that you mean the ratio test for the young HCE rate group, not the overall ratio test for coverage.

Does your plan have different classifications named in the document? What are they? HCEs and NHCEs? There is nothing that prohibits giving the same percentage to each classification.

The difference in your case is that if you allocate 3% to all you should not be doing cross tested to prove nondiscrim with 401(a)(4), you get a free pass as all particiapants are getting the same rate - 3% of pay. You do not need to test on a benefits basis, so will not be concerned about the high EBAR for the young HCE.

Sounds like going forward they may need to put the young HCE in a different class to let the other HCE(s) participate to a fuller extent.

[Guest Julie Woulfe]

thanks, Dawn. I agree with what you say. My question basically was, the Plan calls for a cross tested formula..... if we just do a 3%T/H minimum to all, can we ignore the cross testing called for in the Plan? I believe you are saying yes. This young HCE is in his own group, by the way. This is a takeover Plan for us, and the prior TPA ignored the T/H nature of the Plan and gave him less than 1% last year, so testing worked. Now, giving him 3% throws everything off. We plan to change the allocation formula for next year.

[Dawn Hafner]

Our CT document does not indicate anywhere our method for testing 401(a)(4). Cross-Tested Document is somewhat of a invalid term. The only thing that makes a plan cross tested is the way your prove nondiscrimination which is provided under the regs, the document itself should not use cross testing methods as the way the plan must pass 401(a)(4). Now, if you had an Age Weighted plan that is different, because there my contribution is determined by the interest rates, table selected, participant age and compensation. In an AW plan you can run into problems if you have an HCE get a 3% TH and they get a higher EBAR than everyone else in the plan. Your document should be open enough to use any permissible method under the regs to pass 401(a)(4), including a Safe Harbor method.

[Fred Payne]

HCEs are not required to receive a top-heavy contribution. You could have a cross-tested plan that allocates 0% to an allocation group that consists only of HCEs. If this young HCE was indeed the only participant in his allocation group, the prior TPA acted properly in allocating him only 1% to pass the test.

[Guest Richard Scheer]

Fred, where in the code does it say that HCEs do not have receive the top heavy minimums? Top Heavy contributions have to made for all NON-KEY employees. Depending on the census data, it is very easy to have an HCE who is not a Key employee and therefore must receive the 3% top heavy minimum.

[Guest Julie Woulfe]

I agree with Richard. When you are working on a cross tested Plan you have to be very careful because while you are testing the HCEs, it is the keys versus non keys that you have to worry about as far as getting a top heavy minimum. I have worked on many a plan where the HCEs are not Key, and therefore must get top heavy minimum. Also, you must check the document as some documents say that top heavy goes to both non key and key. In the particular case I mentioned, the young HCE is not key and should get 3%.

[Guest Richard Scheer]

Julie, just curious --- Now that you discovered that the HCE did not receive the required top heavy minimum for the prior year, have you recommended any fixes to the client?

We have taken over a few cases over the years with similiar top heavy problems, and I wanted to know how other TPA's handled this.

[Fred Payne]

Richard, you're right. My brain was not working that late at night. I was thinking that an HCE need not receive an allocation that satisfies the Gateway. If the plan was not top-heavy and the HCE was in its own allocation group, that allocation could be 0%.

[Tom Poje]

Richard:

See Appendix A of Rev Proc 2002-47

.02 Failure to provide top-heavy...

"permitted correction is to properly contribute and allocate the required top-heavy minimum to the plan..."

usually you also have to add earnings, though I believe you can ignore losses.

what is interesting in the above example, such a contribution might cause the cross testing to fail. Depends on whether the individual is key or not - sometimes, as noted earlier, plans exclude keys from minimums.

If everyone received 3%, then of course, the plan would simply test under the allocation method rather than accrual method. I guess technically you have to run the test, because the formula itself is not really a safe harbor formula since people are in classes, but it is a moot point, since everyone received 3% only.

If the above plan had actually needed cross testing (for example 3% going to a young HCE and x% going to other HCEs) it would probably have to be broken up into component plans to pass testing - (e.g. some ees tested on an allocation basis, the rest on an accrual basis) ugh, too much extra work