500 Hour Rule issue

[chris]

Profit sharing plan provides that participant must be employed on the last day of the plan year to receive an allocation. Plan is cross-tested. Advisor is telling employer that e/ee's who terminate with less than 500 hours must receive an allocation, otherwise, the amount of the contribution going to NHCE's would have to be increased...???? Any idea what he may be talking about??? I thought that as long as you satisfied the lesser of either 5% or 1/3 of the HCE's you were OK.... Thanks.

[Tom Poje]

not sure what the advisor is talking about. if the document has a last day provision, then terms receive zippo. have to follow the 'terms' of the document. (humor at its lowest form.)

the terms with less than 500 hours do not have to be included in the rate group test, though if the plan is 401k they will show in the avg ben % test.

the terms with > 500 hours will show with big fat 0's but as long as plan satisfies the gateway minimum with those receiving an allocation AND plan passes nondiscrim test you are ok.

[Blinky the 3-eyed Fish]

Originally posted by chris

I thought that as long as you satisfied the lesser of either 5% or 1/3 of the HCE's you were OK.... Thanks.

You are OK if you still pass nondiscrimination testing.

Seems to me the advisor is saying that giving a contribution to the people who terminated with less than 500 hours is less costly than having to give an increased amount to the other NHCE's to pass testing. That being said, of course you would have to amend the plan to allow for this to occur and could do so within 9 1/2 months after the plan year under 1.401(a)(4)-11(g).

The advisor is either saying that or is a raving fool.