Gateway for HCE's only?

[kmciver]

I have a new comp plan 401(k) that has one 5% owner and two HCE's that are eligible for 2002. (Next year there with be a NHCE also eligible.) The first class is 5% owners and the second class is all others.

Am I correct in saying that class A can max out and I only need to give class B a 3% top-heavy contribution provided that I pass the ABT?

And next year provided that I do not change the classes, I will need to give 5% to class B since the NCHE needs to get the gateway?

Thanks Karen

[AndyH]

This year you are correct, except you don't need to do discrimination testing if you have only HCEs.

Next year you would have the need to satisfy the gateway, but then you also have to pass the 401(a)(4) general test. Satisfying the gateway only allows you to proceed to do the test on a benefits basis if you choose that method. If you can pass on a contributions basis, you don't need to satisfy the gateway.

But if you are maxing out 1 HCE and you have only 1 NHCE then you will not pass on a contributions basis.

[Tom Poje]

The gateway becomes an interesting animal!

Suppose I only allocate 3% to the class consisting of 2 HCEs and 1 NHCEs.

(And max out the owner)

Now what? I failed the gateway test.

How do you fix it?

Do you increase the contribution to all others, or do you put in a corrective amendment and just give an extra contribution to the NHCE?

Obviously, It would be better to have another class 'other HCES' and give yourself leeway.

Hopefully, your class 1 is actually 5% owners (not by attribution) just in case children may come to work.

Andy is correct, this year with only HCEs there is no test.

By something to ponder on, what happens if you used the top-paid group election? I had someone 'failing' a test because most of the people were HCEs. But when he switched the plan to top-paid group it passed easily. Just a possibility to consider.

[Archimage]

So you can use the top paid group election for cross testing. That makes sense but I never really thought about that for plan design. Thanks for the tip, Tom!

[Tom Poje]

well, just so I am clear, the top paid group is not an assumption for tesing purposes, but if your document requires it, then you would have to use it in testing.

you indicated you had a 401(k) plan, so weigh all consequences.

It may help/hurt the ADP test.

[Archimage]

Yes, I realize that but the ADP is something else to factor in as well. Most of the cross-tested plans I work with are using the SHNE so it does not really matter for those. Either way, thanks again for the good tip.

[kmciver]

Thanks for all the feedback. I am definitely going to change the class structure. Karen

[lkpittman]

Tom, in your post, you indicated that satisfaction of the gateway could be accomplished by "corrective amendment" and giving the NHCE an "extra contribution." I don't see why a corrective amendment is necessary, if the plan includes the minimum allocation gateway requirement language: "Notwithstanding anything to the contrary under this Section . . . any allocations made under this Section for Plan Years beginning on or after January 1, 2002 must satisfy the "Minimum Allocation Gateway" set forth under Section 1.401(a)(4)-8(B)(1)(vi) of the Treasury Regulations. . . . . [satisfaction of gateway requirement is set forth in detail in this paragraph]." For example, I've got a plan that provides for an allocation of 3% of compensation plus an additional amount equal to 5% of compensation in excess of $50,000. In 2002, this fails gateway and a 3.9% allocation is needed for NHCEs to satsify gateway. With the language I used regarding the gateway, I would think I could leave my allocation formula alone (no amendment required) and just put in the extra amount needed for the HCEs to pass gateway. Is there something wrong with this--do you think an amendment is needed which reflects the additional 9% for NHCEs?

[Tom Poje]

I was referring to plans that do not carry such language as you indicated.