New Comp - Top Heavy

[pmacduff]

OK - I know that this question has been asked in many ways before, but I want to be sure that I am clear...I have a top heavy 401(k) PS plan with immediate eligibility for deferrals and a 2 year wait for new comp PS. Participant is deferring but has not yet met the 2 year elig for PS, does she receive a TH minimum? I think that she does, but wanted to clarify. Is this supported anywhere? My guess is that even though we refer to it as "dual" eligibility, the employee is actually a participant immediately and the wait for a PS allocation is 2 years. Therefore, the participant is eligible for the TH even though she won't be receiving the PS allocation. Everyone agree with me? Thanks for any thoughts.

[Blinky the 3-eyed Fish]

I agree that the person eligible for the 401(k) only will need to receive a TH minimum contribution. Also, you say it's a new comp plan, so they will also need to receive the minimum gateway contribution as well. However, if you disaggregate the otherwise excludables, then they will not have to receive the gateway.

[Tom Poje]

IRS Q & A #7 at the 2002 ASPA conference supports the idea that an individual who is eligible for deferral only (e.g. immediate entry, but has worked less than 1 year) is due a top heavy.

The ERISA Outline Book says the same thing.

So there are two places for support on this idea.

[pmacduff]

Thanks for the info...actually, this particular participant has already worked over 1 year, but the PS portion has a 2 year eligibility with immediate vesting for PS. She just hadn't hit her 2 year mark yet...also - Blinky...the general discrimination testing is passing with her only receiving her top heavy & her deferrals, are you saying she is required to get a gateway contribution anyway? In this plan, the lower group had to be given 6% in order for the HC's to max, so does that mean I have to allocate 6% to her as well? Thanks again for any info.

[AndyH]

You would need to give her the lesser of 5% or 1/3 the allocation to the hightest HCE, but only for Plan Years starting in 2002+, to be able to do the cross test.

[Blinky the 3-eyed Fish]

I agree with Andy, except that an HCE's height has nothing to do with it.

[pmacduff]

Sorry to be dense, I thought I had most of this down and then along comes a client with a 2 YOS eligibility who messed with my thinking....so...the gateway has to go to anyone who satisfies 1 YOS, age 21 regardless if the plan PS eligibility is two YOS? - Also - I only need give her 5% even though the other NHCEs are getting 6%?

[Blinky the 3-eyed Fish]

Yup.

I try and think of it this way. All who benefit under the PS portion of the plan, whether it be from a regular allocation, a safe harbor nonelective allocation or a top heavy allocation, need to receive the gateway. However, if the otherwise excludable employees are disaggregated from the testing (and are not cross-tested), they do not have to receive the gateway.

[AndyH]

As Friday progresses, my typos increase geometrically, and the pattern is inverse to my ability to pick such things up by proofreading, and to my ability to determine if my sentences make any sense. Better call it a day soon.

[AndyH]

pmacduff, I'm not sure you have it down exactly. The gateway need not be more than 5%; this doesn't mean that if the document has a formula that gives someone 6% that you can cut it to 5% by waiving a magic wand, however. Your document must be followed, and limiting someone to 5% will require competent drafting.

Second, the gateway isn't being caused by the 2 year wait; it is being caused by the need to provide a top heavy minimum, which is caused by a 401(k) provision. If you had no k provision, someone with 1 YOS would not be subject to the gateway.

[Tom Poje]

it is Friday, it is late, and I am past my 4:15 limit

oooooooooh. that is bad.

time to go home.

without looking it up, I think the otherwise excludable rule only applies to one year wait, not the two year wait scenario. somewhere in the back of my mind....

also, in regards to the two year wait. be very careful you aren't treating this as a 24 month wait. rememebr if the ee completes 1000 hours from date of hire - anniversary, and then 1000 hours in the plan year they get credited with two years - even though they may have only worked 18 months or something like that. At least, I seem to recall that is the way it works.

[maverick]

It's Friday afternoon and my mind is fried.

Since there's a 2 year wait (with 100% vesting on entry date) for the p.s. source, what vesting applies to the top heavy contrib? Yes, I know that plans have a top heavy vesting schedule, but here's why I ask:

Assume the plan was not top heavy until this year, so each participant's p.s. dollars are 100% vested.

Person X, who isn't eligible for a p.s. contrib, gets a top heavy contrib. Now we have to set up another source on the recordkeeping system to track top heavy contribs for everyone w/less than 2 years service?

Thanks.

[AndyH]

Ooooooh. Good question. Got me stumped.

[Mike Preston]

Tom, with 2 year eligibility plans one should not select the option to measure eligibility computation periods on the basis of plan years after the initial eligibility computation period. That way, an individual needs to work 24 full months to have 2 eligibility computation periods. Right?

[Mike Preston]

With respect to the vesting percentage for the individual forced to get a contribution before being eligible for the regular profit sharing contribution, what does the plan say? My bet is that top-heavy provides a minimum vesting schedule that is meaningless, as the vesting schedule under the plan is 100%.

[pmacduff]

Mike - you are right...in this plan anyway...I wasn't worried about the vesting of the TH contribution because this plan vests

ALL contributions 100% so the TH vesting is irrelevent. My biggest concern was the fact that I have to give the participant with >1 YOS but less than 2 YOS (the PS eligibility) a gateway contribution. According to all of the responses here, a 3% TH to her is not enough, I must provide the gateway contribution...even if my testing passes without allocating a gateway to her.

AndyH - We don't list actual allocation percentages in our cross tested plans. We can then maximize the owners and determine what % is necessary to the lower group in order for the testing to pass. We can also, if necessary, lower a HCE % (i.e., HCE children who don't necessarily need to max out), so that is isn't necessary to give the lower group more than 5% to pass.

[Mike Preston]

The vesting post was in reference to Maverick's posting. In a situation where you you have 2 yos eligibility for PS and 1 yos (or less) for deferrals, you might want to consider separate plans.

[Tom Poje]

Mike:

yes, I agree, if plan has 2 year wait it should not shift to plan year after initial period. that way you do indeed have a 24 month wait.

my comments were more of a reminder to be careful of what the document might say.

[Guest PLHart]

I've been following this thread as I have new plan coming in with similar scenario: 1 yr 401(k) eligibility and 2 yr new comp p/s eligibility and plan is top heavy.

We, of course, would prefer not to give minimum gateway to participants who are on p/s component only due to top-heavy minimum. IF WE BUILD TWO SEPARATE PLANS, ONE FOR 401k and ONE FOR NEW COMP, WOULD THAT THEN ELIMINATE THE NEED TO GIVE MINIMUM GATEWAY TO THOSE PARTICIPANTS WHO ARE RECEIVING THEIR TOP HEAVY MINIMUM IN THE 401k? (as it is a separate plan)