Gateway and Top Heavy

[Gilmore]

Sorry if this one has been beaten to death but...

I have a cross-tested profit sharing plan, plan year end is October 31, 2002. There is one participant who worked less than 1000 hours and will be getting a top heavy contribution. It is my understanding that for this plan year I don't have to worry about the gateway.

But...

In looking forward to the next plan year, would I need to raise the participant's 3% top heavy contribution to 5% to meet the gateway?

Thanks.

[Mike Preston]

Maybe. Probably, even. But not definitively. If the a4 testing is done without consideration of those who do not satisfy statutory minimum age/service requirements, and if this person falls into the category of not satisfying statutory minimum age/service requirements, then no.

However, if the person is in the plan because they at some point satisfied the statutory age/service requirements, then yes.

[Tom Poje]

which raises the question, and I figure Mike knows most of this stuff: (This one has been bugging me of late)

It was indicated the plan was cross tested, so we will assume two classes

the HCE

other (who work 1000 hours)

one ee eligible for the plan now works less than 1000 hours and so is not eligible for the contribution, but receives top heavy.

That is because the document says he gets top heavy.

But what in the document says you increase the amount to the gateway minimum? If you do so, yes, you are following the reg requirements, but what in the document says you have the right to do this? And so, have you failed to follow the terms of the document? In other words, do you need language in the document to justify increasing the top-heavy only people to the gateway minimum?

[AndyH]

Tom, I think you are right, but some documents have specific language to that effect. Our volume documents were written with some "catchall" language about the intent of satisfying the gateway regulations that our legal department feels authorizes such an increase (from less than 5 to 5) if necessary. Kind of like a gateway failsafe provision. It was approved.

Other companies have documents which are specific to this point, or so I've been told. But absent such language, you need either a class that covers only such people (as Sal Tripodi suggested at ASPA) or you will need a corrective amendment.

This is even more of an issue with SHNECS because then you have to deal with terminated people as well.

[KJohnson]

I know the tendency has been to go "bare bones" in the Plan with regard to cross-tested allocations and testing, but I did put this into my volume submitter(and it was approved):

For Plan Years beginning on or after January 1, 2002 any allocation under this Section 4.02 must satisfy one of the two minimum allocation gateways provided in Section 1.401(a)(4)-8(B)(1)(vi) of the Treasury Regulations.

[dmb]

OK, now i'm confused. Based on prior threads, i was under the impression that if an active participant worked less than 1000 hours in a top heavy plan and the gateway was 5% but the minimum for the "others" class to pass discrimination testing was, say, 8% that the above participant would need to get the 8% if there was no lanuage in the document. Is that not correct???

[AndyH]

dmb, I'm not sure what your question(s) are. There appear to be several issues in your question. Could you clarify it please.

[dmb]

Ok. I have a top heavy cross tested plan with two classes, Owners and others. The owners are getting 20% of comp, the others are getting 8% of comp to pass discrimination testing. There is one active participant who worked less than 1000 hours, but since he is active is entitled to the top heavy min.

The document does not have any specific language with regards to this situation. My question is how much should this participant receive?? The 3% TH min, the 5% gateway, or the 8% that the other participants are getting???

Thanks.

[AndyH]

If the requirement for a contribution is 1,000 hours, then it looks like under the terms of the plan he gets 3%, which means that either you limit the HCEs to 9% (assuming that the percentage contribution is discretionary), or you amend the plan in some manner which gets the top heavy only person to at least 5%.

As Mike pointed out, however, you might not need to do this if the person is under age 21 or has not completed 1 year of service, because you could then disaggregate "otherwise excludable employees".

But if you need to amend, one way is to have an amendment that says that for the plan year ending ___, in addition to the contributution allocated pursuant to section _____ of the plan, an additional contribution shall be made to the extent necessary to get any participant entitled to any contribution to 5% of pay. If this is after the end of the plan year, then you need to look at the rules under 1.401(a)(4)(11)-(g).

Of, if the plan has a last day requirement for an allocation and it is a 2002 calendar plan, you could still amend the plan to waive the 1000 requirement for the current plan year, in which case everyone other than the owners get the same percent.

Another possibility is to add a third class, those who are participants, are employed on the last day, but have worked under 1,000 hours. And give that class whatever you wish (but at least 5%).

Those are your options.

[pmacduff]

FWIW - I asked this in a prior thread and was told that as long as the document does not specify %tages for groups, you can get away with giving the TH only person the 5% gateway, no need to do 8% provided the testing passes. As a caveat, however, I was advised to be sure that the plan document did not refer to the gateway in specific terms which might dictate this issue and require 8% to the participant eligible for TH.

[Guest Keith N]

I have a cross tested plan with a 1 month of service requirement to become a participant. It defines an Eligible Participant to be anyone who completes 1,000 hours and is employed on the last day. Only Eligible Participants receive an Employer Contribution. It also has language similar to what KJohnson suggested, but states that gateway minimum is only given to Eligible Employees (1000 hr & last day).

The top heavy section contains language that requires the Plan to provide at least 3% to all active participants, regardless of the hours worked.

Assuming I don't need the

If I need them to pass 410(B), do I definitely need to give them 5%?

Assume my HCE's are getting > 15%.

[Tom Poje]

the regs are clear:(All the following are from the Federal Register, vol 66, no. 126, june 29, 2001 "Explantion of provisions"

employee - defined in 1.401(a)(4)-12 is an employee (within the meaning of 1.410(B)-9) who benefits as an employee under the plan for the plan year.

NHCE - 1.401(a)(4)-12 an individual who is not an HCE

Gateway minimum is satisfied if each NHCE receives the lesser of 5% (of 415 comp, can be from date of participation) or 1/3 the rate of the HCE.

An individual who does not otherwise benefit under the plan for the plan year is not an employee under these regulations.

so, an individual receives a top heavy. does he benefit? obviously, yes. therefore, he must receive the gateway minimum.

Careful. top heavy minimum is 3% of total plan year comp, no matter when you enter. It might be a larger contribution than the 5% gateway based on date of participation.

There is one exception to the above:

If the plan benefits ees who have not met the minimum age / svc requirements of 401(a)(1), the plan may be treated as two separate plans - one for otherwise excludables employees and one for other employees benefiting.

If treated as two separate plans, the gateway need not apply to the otherwise excludable group.

Note: This requires you to test separately -410(B) and everything. you can't test 410(B) as a whole, and avoid gateway minimum by cross testing separately. you can not have the best of both worlds.

Further, I would add a caveat to the Fed Register statement. Suppose because of your immediate (or lesser eligibility requirement) you let an HCE into the plan. If you provide a larger allocation to that individual, you will have to satisfy the gateway minimum for that group as well.

[Guest Keith N]

I apologize for being so thick, but I keep reading what sounds like conflicting statements.

Based on your first statement you said it was "obviously, yes. therefore, he must receive the gateway minimum. "

But then you say "If the plan benefits ees who have not met the minimum age / svc requirements of 401(a)(1), the plan may be treated as two separate plans - one for otherwise excludables employees and one for other employees benefiting. If treated as two separate plans, the gateway need not apply to the otherwise excludable group. "

Since the participants I'm concerned about never ever completed 1,000 hours and therefore never satisfied the age/srv requirements of 401(a)(1), and assuming I test the plan as separate plans..... then 3% is ok?

Tom, I know it must be frustrating continuing to answer what seems like the same question..... but we appreciate your input.

[Tom Poje]

no problem, better to be safe than sorry.

yes, if an ee never had 1000 hours[not just the current year], then they never would have entered the plan if the plan had required 1 year of service. therefore, those people would not have to be given the gateway minimum providing you test separately.

of course, it might be in your best interests to not test separately if these people are young and low paid. it makes passing the non discrim test easier to include them. so consider weighing your options. (Just make sure your document would allow you to increase their contribution.) an extra 2% to a lowly paid young ee might save money if the plan would fail otherwise. and if it is people who never work 1000 hours...hmmm........what is their vesting percentage....you are looking at future forfeiture $

[Gilmore]

In my original question I stated that the plan year began November 1, 2001. So for the plan year ending 10/31/2002 I'm assuming that I don't need to be concerned about the Gateway.

Does this mean I can give the NHCE with less than 1000 hours just the Top Heavy contribution?

And to further the question, and I am using Relius Admin software, when I run my compliance tests do I run the cross test with that NHCE as benefitting or not benefitting?

Relius has a new test called "Minimum allocation Gateway" or something like that, and when I check that option it automatically puts the Top Heavy only receiving ee in the test with her top heavy contribution. Is that correct?

Thanks for the help.

[Tom Poje]

you said a mouthful.

lets see how more confusing I can get.

no matter what plan year you are doing, for purposes of coverage(read that as info for the schedule T), you want to treat the top heavy only people as benefitting.

now suppose the plan was not cross tested. you then check coverage by treating those people as not benefiting. If you still pass coverage, you are considered to have a safe harbor formula and you are done. If you fail coverage, you include the top heavy people and run nondiscrim. at this point, you have a cross tested plan consisting of two classes. those at one rate and those getting 3%.

ok, if the plan year begins before 2002, there is no gateway minimum test. ees with less than 1000 hours get top heavy only.

when you run the Gateway report, the report automatically includes the top-heavy people. that makes sense since they are now eligible for the gateway, and the system will check for that.

It should be impossible to run the gateway report if plan year is pre 2002, or put another way, don't run that report if plan is pre 2002.

it has been noted elsewhere, that the gateway test has an error in the body count - it is double what it should be, though it does not effect the test results.

[Gilmore]

Thanks Tom, I appreciate your help.

Actually, even if you don't check the Gateway test option it still includes Gateway test language on the discrimination testing reports. Relius just told me to ignore it for pre-2002 plan years.

But actually, it was that Gateway test option that got me to question whether the top heavy only ees needed to be considered benefitting or not benefitting for purposes of running the testing.

As I read your response I understand that, yes, they should be considered benefitting and the 3% contribution is tested along with the other groups' contributions.

Thanks again for your help.

[Guest mw0410]

In a conversation yesterday, I was told that if you test on a contribution basis as opposed to a benefit basis, you don't have to increase the 'top-heavy only' or terminated participant entitled to 3% nonelctive contribution to 5% gateway minimum. The reason given was that when testing on a contribution basis it is not really considered cross-testing. Can anyone verify this?

[Mike Preston]

So confirmed. If you test a DC plan on "contributions" it is NOT cross-testing.

[pmacduff]

I have a cross tested plan that is NOT top heavy. A participant comes in as of July 1, 2002. Comp is defined in document from date of participation. Can I give this participant 5% of salary from 07/01/02 - 12/31/02? Someone mentioned to me that even in a non-top heavy plan, the old cross tested rules required that you give 3% to everyone. If I used 3% of this participant's total annual comp...it is a larger $ than 5% of comp from July - Dec. I want to do this correctly........any advice/cites would be greatly appreciated!

[AndyH]

The 3% requirement never existed on account of cross testing. That is bad information.

[pmacduff]

So Andy - you are saying it's ok for me to give 5% from date of participation (July 1 - Dec 31) as long as my tests pass?

[Tom Poje]

yes, the 5% need only be based on date of participation.

if your plan was top heavy you would have the case where the person's 5% minimum gateway from date of participation would probably not be large enough to cover the required top heavy minimum based on full year comp, and therefore you would have to increase the contribution to 3% full year

[Mike Preston]

Yes, as long as compensation during that period is 415©(3) compensation. See 1.401(a)(4)-8(B)(1)(vi)(B).

[KJohnson]

As to earlier comments made by Andy H and Tom Poje, it looks like Corbel agrees that an amendment is required for its document:

http://www.corbel.com/news/technicalupdate....asp?ID=196&T=P