Cross Tested Safe Harbor 401k Plan

[Guest TAG]

Situation-Xtested SH 401k plan satified by non-elective 3% er contribution regarding terminated employees.

Okay, a terminated EE gets the 3% SH contribution and the gateway rules bring him up to 5% (or 1/3). Has anyone read a definitive answer on the vesting allowed for the extra 2%(or so). If the part is 0% vested, is this a meaningful benenfit if we give him or her the gateway, then forfeit the whole thing?

I guess what I am asking is that I have read that some plans are giving upon the employers discretion a qnec for the extra gateway contribution in this situation..some plans do not allow for qnecs and do we have to fully vest the gateway contribution.

Please give any and all input.

Thanks

tag

[Tom Poje]

I would assume the safe harbor notice indicated a 3% SHNEC would be made.

As a result, I see no justification in making it a 5% SHNEC to satisfy gateway minimum.

The gateway minimum, as far as I can tell, only requires the 5% (or 1/3) in any combination of nonelective contributions.

Therefore, a 2% profit sharing appears fine - even if 0 vested. (Suppose you have someone who is active and only worked 1 year, so is zero vested. Would you argue that the gateway has to be meaningful in his case as well?) On the other hand, you indicated the ee is terminated. If terminees are excluded from the profit sharing, then that would require an -11g amendment, and at that moment I would say you have to provide a meaningful (vested) contribution.

but then, my opinions probably carry less weight than the IRS Q and A's at ASPA!)

[Guest ScottB]

If your cross tested plan allows for last day of service 1000 in order to receive the contribution ABOVE the 3% QNEC would this cause an overall failure of the 5% gateway.

Ex. You run to groups that pass 20% for owners 5% for Staff. 3% of the staff contribution is the QNEC and the last to are subject to last day 1000hr. Let's say your overall percentage ends up at 4% for the Staff group. Would that mean the Owner group could only do 12%?

[Tom Poje]

Scott:

not sure what you are saying here.

you do not look at overall average to the NHCE group, e.g. some get 5% others get 3% so that averages to 4%.

each NHCE who received a nonelective has to get the full gateway.

By the way, in this question it was last day/1000 hours received an extra contribution over the 3% SHNEC.

A QNEC is a different animal. very similar, but IRS Notice is clear on this one. see 98-52 VIII D

sorry, I have gotten to be a stickler on the use of terms QNEC and SHNEC (which really doesn't exist except as a great abbreviation)

[Guest ScottB]

Thank you for the reply. sorry about the QNEC.

What I am trying to understande is Gateway. If you have a crosstested safe harbor plan that has a last day/1000hr in it you can only apply the last day/1000hr to the contribution above the safe harbor 3%. Useing the prior example of a new comp calc passing for two groups 5% Staff 20% Owner, am I right in thinging that the 5% group won't pass Gateway if you apply the last day/1000hr to the 2% above the shnec 3% you could end up with a % less than the 5% Gateway?

[Tom Poje]

what I understand from the example

owner - 20%

most others - 3% SHNEC and 2% additional profit sharing

this leaves some terms, less than 1000 hours with just the 3% SHNEC.

at this point the plan fails gateway minimum.

I have seen one document that calls for the gateway minimum to be provided. (Oh what the heck, New England Basic Plan Document has this - I have only seen a couple others so I can't speak for other documents)

I have seen another that does not have the language.

So, depending on the document, one plan has to allocate an additional 2% to the one group to operate under the terms of the document.

The other one will have to put in a corrective amendment to remedy the situation.

[Guest ScottB]

Thank you!!

[Earl]

and if you are solving the problem of how to get the terminees with less than 1000 hrs the extra 2% by a corrective amendment, that is where the meanful benefit/0% vested issue comes into play?

[Tom Poje]

Earl:

I think you have a valid point, especially if you have to use a corrective amendment.

On the other hand, if the document has language similar to top heavy language (e.g. all participant benefiting will be provided additional contributions to meet the gateway minimum) then what are you going to do if the ee is 0 % vested. you wouldn't all of a sudden vest him, would you?

what would be the difference between that scenario and in a plan that has immediate eligiblity and you have a participant who will never work 1000 hours but gets a top heavy year after year. Those top heavy contributions don't seem meaningful either.

At least in the safe harbor plan the ee is vested 100% in some of the $.

I am only speculating at this time.

[Earl]

No, I wouldn't vest the TH min or worry about the guy getting a contrib due only to immed. elig.

I am worried about the situation where I guess I have to correct my document by retroactive amendment to get the person entitled to a TH min 3% only up to the 5% Gateway.

I am using Corbel's PPD Prototype and Volume Submitter and think I basically have a problem with all my new comp. plans. I can't find that I have any discretion to increase the TH min allocation over 3%, so I can't use the 5% gateway, only the 3x Gateway.....

Best solution I have seen so far is to create a group defined by their eligibility for only a TH min. So basically there is no such thing as a 2 group plan. The most simple would be 3 group; key, nonkey and those elig only for a TH min.

[Tom Poje]

Earl (and others)

Just to keep you up to date, the word from Corbel is as follows

"We are going to issue something within the next week or so regarding this problem. Unfortunately, the volume submitter was approved right when the regs came out so there isn't any language in the document dealing with this and we can't add anything without going through the approval process again. So, we're going to outline the various options that are available to solve the problem. Again, we plan on having this within the next several weeks."

...

so, they are aware of the problem, and I guess we will find out soon what we will need to do to our documents.