"Cross-testing" in a prototype to satisfy 401(a)(4)

[Guest YATPA]

Fact Pattern:

- PSP with discretionary, pro-rata allocation

- non-standardized prototype document

- top heavy

- 6 participants; 2 are HCEs

- 3 parts earn commission only; 1 is HCE

For 2002 PY, def of comp has been amended to exclude commissions. Plan fails 414(s) testing. Trying to satisfy 401(a)(4) using "cross-testing". We were able to pass general test giving 3% TH min to commission-only ee's and by giving 11% of comp to other 3 ee's.

1. For testing purposes, can we cross-test to pass 401(a)(4) if we're using a prototype?

2. Even though this isn't a cross-tested plan from a plan design standpoint, do we still have to satisfy the gateway test?

Any other ideas for satisfying?

[Mike Preston]

Unless the plan precludes it, you can do it. If you cross-test, you must satisfy the gateway.

[Guest YATPA]

Follow-up question re the mechanics ... I know that when 414(s) fails I can either amend the definition of comp to satisfy 414(s) or allocate the contrib under the plan's def of comp and satisfy 401(a)(4) using rate group testing. The problem with the later is that there is no comp to base the alloc on since it's all excluded comp.

This is our thinking at this point: allocate contrib according to plan formula and comp def. Since all comp is excluded for 3 ee's, they receive no allocation. Give them 3% TH min based on 415 comp. Still have to satisfy gateway test. Each group (commission-only and salaried ee's) has 1 HCE and 2 NHCEs. In this scenario commission-only group gets 3% and salaried gets 11%. Do you bump up the NHCEs in the commission-only group to give them 1/3 of 11%? Do you increase all those in the commission-only group, even the HCE? Conversely, do you reduce only the HCE in the salaried group to 9% and leave the 2 HCEs at 11%?

This is getting pretty confusing. We're essentially using a cross-tested allocation now and not following the allocation formula.

How do you get something like this to pass? What would you recommend doing? (In hindsight, we should have excluded the 3 commission-only ee's since we could have passed coverage.)

[Mike Preston]

Keep in mind that you have to follow the terms of the plan. Hence, one cannot just bump people up to the gateway unless the plan has a provision allowing that. Similarly, one cannot just bump up the NHCE's in a particular, pre-defined grouping to the gateway because that is necessary to make the plan pass.

With that said, I agree with the result you are attempting to get to. If the document allows you to get there, you can do it.

What does the document say?

After you decide how close you can get to where you want to go within the four corners of the document, you can then get the rest of the way there with an -11g amendment.

[Guest YATPA]

Sponsor is using a basic non-standardized prototype that doesn't address. It just says allocation has to pass 401(a)(4). How would you recommend we proceed from here?

I don't recall what the 11g amendment is - can you elaborate?

[AndyH]

Maybe I'm missing something, but aren't you simply saying that 2 NHCEs and 1 HCE are getting 3% and 2 NHCEs and one HCE are getting 11%? If so, don't you pass by testing the plan on a contributions basis, with two resulting rate groups, each with 100% coverage? If so, you pass and you don't need to bother with the gateways.

You are testing on gross wages. On a contributions basis. Not cross tested.

This is a quick reaction. Am I missing something?

[Mike Preston]

Andy, Andy, Andy. Trying to confuse us with the facts, huh?

It does seem like if you follow the terms of the document and run your tests, they will pass. I'd say that is pretty darn close to where you want to go!

Unless I'm missing something, too.

[Guest YATPA]

You're right - we were trying to confuse the facts! We jumped right over testing on a contributions basis and went right to benefits basis testing. We made things much more difficult than they should have been. Thanks so much for the fresh perspective.