Eligibility for Profit-Sharing Contribution

[Guest CRC02]

A 401(k) permits immediate participation for elective deferrals and would like to add a profit-sharing component. To receive a profit sharing contribution, a participant would need to be age 21 and have completed 1 year (1,000 hours) of service. For purposes of determining eligibility for the profit sharing contribution, can the employer use two entry dates--the first day of the plan year and the first day of the seventh month--after meeting the eligibility requirements?

[MWeddell]

Yes.

One side note: if a participant becomes eligible for the profit-sharing contribution halfway through the plan year and the plan document specifies that only compensation from that point going forward is used for allocating the profit-sharing contribution, make sure your client can track the compensation earned during this time period. I've seen that plan design put into place without any advance thought about tracking the data in that manner.

[MBCarey]

I too am working with a plan similar to this which is also a top heavy new comparability plan design. The plan does give the minimum gateway contribution of 3% to eligible employees based on only the comp from the time the ee became eligible. The plan passes the 1/3 gateway test.

However, wouldn't top heavy minimums have to be calculated on the total year compensation and not just compensation from the time the employee became eligible to satisfy top heavy minimums?

[pmacduff]

Yes - top heavy is required to be on whole year's comp...........

[Brian Gallagher]

just make sure that the plan document allows for the two different entry dates.

[2muchstress]

Just an obvious word of caution:

If the plan is top heavy or becomes top heavy, the employer will be required to contribute the th min to all participants - including those who are eligible for 401(k) deferrals but have not yet become eligible for profit sharing.

I have had to explain this to many employers whose plans had dual eligibility and became top heavy. It is not a fun experience to try to convince them they have to fund 3% of full year comp for everybody even if they are not eligible for profit sharing.

[austin3515]

2muchstress -

Thanks for saving me some research - I was about to look up that very quesiton on Monday!

[Tom Poje]

MBCarey's statement that the plan gives the minimum gateway of 3% and passes the 1/3 gateway test is a bit confusing.

The minimum gateway is either

5% of 415 comp from date of participation or

1/3 gateway.

There is no '3% minimum gateway'.

One would expect that the 3% top heavy minimum based on full year comp to satisfy this for someone who enters midyear, but I guess you always need to verify this is true.