Gateway minimums...

[jaemmons]

I have a plan which is safe harbored using the 3% non-elective contribution, but has a 2 year wait for any additional profit sharing allocation. There are some employees who will not meet the two year requirement and are nhce's. My question is this, if an nhce employee is eligible for the safe harbor but not the additional ps allocation, are they required to receive an additional 2% (to bring them to a 5% allocation rate), since they are benefiting under the plan?

I am thinking that they don't need to since they are ineligible for any additional ps $'s.

[Tom Poje]

by that logic, if you had a 1000 hour requirement or last day rule to receive profit sharing you wouldn't bump those people up either because they are ineligible to receive any additional profit sharing.

The person in question benefitted with a nonelective contribution, I would say you have to give him an additional contribution to satisfy the gateway. Ah, that goes against the terms of the document. Can you say corrective amendment.

Interestingly enough, the latest ASPA ASAP (12/13) discusses problems with cross tested plans that do not have language dealing with the minimum gateway. while this ASAP doesn't address your issue of a two year wait, I would say the logic applies.

[Blinky the 3-eyed Fish]

Agreed. I had posted the ASPA ASAP for 2 minutes until I realized that I probably shouldn't do that.

[Belgarath]

Tom - I'm not so sure I agree. I know that there's a lot of disagreement out there on this subject, and I wish the IRS would address it officially!

I also read the ASPA piece, but it seems to me that they are generally discussing a situation where a participant has already satisfied the age and service requirements. In which case, I agree. But let me back up and give my logic, or what passes for it with me, as to my opinion.

1.401(B)-6(B) provides guidance on situations whare a plan provides multiple age and service conditions, such as the 401(k)/cross tested situation in question. Effectively, in conjunction with 1.410(B)-7©(3), it provides that there is mandatory disaggregation of the two components, and that employees who are ineligible for the component which requires more rigorous age and service requirements (2 years in this case) are treated as statutorily excludable as to that component for 410(B) purposes. And since there is mandatory disaggregation for 410(B), there is also disaggregation for 401(a) testing purposes. (See 1.401(a)(4)-12 definition of plan.) So the "new comparability" component will be tested separately for 401(a)(4), and only those employees benefitting under that component (2 years in this case) will be tested for nondiscrimination as to that component.

So my conclusion is that as long as an employee hasn't satisfied the initial requirements for eligibility, then they are not automatically required to pass Gateway simply by virtue of receiving a safe harbor minimum in the 401(k) portion.

I'm sure lots of folks will disagree, and I don't blame them - I've gone through a lot of mental gymnastics in arriving at this interpretation!

[Tom Poje]

for those interested (or not aware of the ASPA ASAPs):

The ASPA ASAP is an e-mail or fax subscription news service that provides vital and timely updates on breaking legislative and regulatory developments critical to those in the employee benefits field. There are approximately 40 issues per year, (though the exact number of issues varies depending on the amount of legislative and regulatory developments).

If you are an ASPA member, you can proceed directly to the ASPA ASAP archive by clicking here, log into the eASPA portion of the website, and proceed to the Members Only section to access the ASAPs.

To see what the ASPA ASAPs are all about, read some examples of past issues members received:

2001-22, The Internal Revenue Service Releases Guidance Relating to Catch-Up Contributions, November 19, 2001

2001-29, IRS Revises Mortality Table for Plan Benefits and Limitations, December 20, 2001

2002-01, Notice 2002-3 Replaces Safe Harbor Rollover Notice, January 3, 2002

ASPA members receive the ASPA ASAP via e-mail at no charge. A facsimile subscription is $75 for members and $300 for non-members.

Interested in subscribing to the ASPA ASAP? Click here to download the .pdf order form and fax to the National Office at (703) 516-9308.

Have any ASPA ASAP questions? Contact Jolynne Flores, Government Affairs Manager at (703) 516-9300 or jflores@aspa.org.

[Tom Poje]

Belgarath:

My problem with the 2 year wait issue is as follows:

(and I could certainly be wrong)

One can avoid providing gateway minimums if one tests 'otherwise excludables' separately. The ERISA Outline book simply says that you can't use the 2 year rule while testing otherwise excludables. And I am too 'lazy' to research further on 410(a). shame on me.

my logic follows these lines:

consider an employee who has worked more than 1 year but less than 2. by law he has to be in the 401k. you simply can't have a 2 year wait for 401ks. Now, the plan is safe harbor, you get a free ride on the ADP test by providing the safe harbor to him. but you don't want to give him the gateway. that means you are going to perform the ADP test separately as well. But wait, you can't do that. the individual completed his one year and is in the test.

Now, the employees who have less than a year/age 21, yes, I could see not giving them the gateway because they wouldn't have been in the 401k if you had a 1 year wait.

[jaemmons]

After I posted, I read something interesting in the final regs. Under the final regulations there is an explanation that:" Similarly, pursuant to Section 1.410(B)-6(B)(3), if a plan benefits employees who have not met the minimum age and service requirements of IRC section 410(a), the plan may be treated as two separate plans, one for those otherwise excludable employees and one for the other employees benefiting under the plan..." It goes on to say that those who do not meet these minimum requirements do not need to receive the gateway contribution.

Under IRC 410(a)(1)(B)(i), any plan which uses the 2 year requirement and provides for 100% vesting can substitute the "2 years of service for the one year of service requirement under 410(a)(1)(A)(ii).

Since the plan requires a 2 year wait for any additional discretionary profit sharing allocation, I think it is safe to say that those employees who do not meet the 2 year requirement can be disaggregated pursuant to the final regs and not receive the minimum gateway.

[Tom Poje]

however 1-410(B)-6(B)(3) "plans benefitting certain otherwise excludable employees"

(i)

"...the effect of this rule is that employees who would be excludable under paragraph (B)(1) of this section (applied without regard to section 410(a)(1)(B))....

Note: 410(a)(1)(B) is the section pertaining to using a 2 year wait

(ii) ...In determining whether the plan benefits employees who would be otherwise be excludable under paragraph (B)(1) of this section (applied without regard to section 410(a)(1)(B))....

both of these points say you can't use the 2 year wait rule and apply otherwise excludable option.

and the only way to avoid the gateway minimum - is to apply the otherwise excludable option (and test separately)

again I would point out, or at least ask, how you would perform the average benefits percentage test with someone who has worked more than 1 year but less than 2 years.

The person is not excludable from 401k, because the max exclusion is one year - you can't have a two year wait. So they can't be included in the otherwise excludable group.

But now you look at the two year wait and want to turn around and treat him as otherwise excludable and therefore exclude that individual from testing. you are trapped

[Belgarath]

Tom - thanks for bringing up the 2 year issue. I'll have to look into it when I have time. To be honest, I hadn't even considered this - when I looked into this whole crazy question, it was on a 1-year eligibility, and I never even considered the 2 year angle. Sigh...