zero allocation to particular classification and be relieved of gatewa

[Brenda Wren]

I have a cross-tested 401(k) that is NOT top heavy and is NOT a safe harbor. Plan covers over 100 employees and we have a number of different classifications. We are considering a zero allocation to one classification that includes HCE's as well as another classification that includes NHCE's. I think we will pass cross-testing. As I read the 401(a)(4) regs, which reference the 410(B)(3) regs as to who is "benefiting" for cross testing purposes, it does not appear that I have to give each a minimum gateway contribution. Again, plan is not top heavy and not safe harbor, so no one will be "benefiting" in that regard. The plan does not exclude these classifications, we simply want to exclude them on a year-by-year basis depending on how the numbers work. Has anyone run into this situation? My software (Relius) seems to agree with me and is giving me a "pass" on the gateway test even though I have many otherwise eligible NHCE's receiving zero.

[Mike Preston]

Works for me.

[AndyH]

But you better pass coverage by the ratio percentage test, as the IRS has taken the position that a 0 rate group is tantamount to an unreasonable eligibility classification, making the average benefit percentage test unavailable for coverage testing.

[Mike Preston]

Citation?

[AndyH]

It was from a 2002 Q&A, ALI-ABA I think. I'm having trouble finding it at the moment but I will.

[AndyH]

Q&A #3 here. I lied. It was 2001.

http://www.abanet.org/jceb/2001/qa01irs.html

[Mike Preston]

I think "making the average benefit test unavailable for coverage testing" overstates the case a bit. First, I'm not sure that the IRS is necessarily correct in their response. Second, even if they are correct, they point out that if the plan in question is aggregated with another plan then the aggregated group that is benefitting is the appropriate grouping to determine whether 410(B) coverage is met.

Thanks for finding the reference.

[AndyH]

Mike, I don't understand your second. Isn't that just saying that if aggregation makes a zero not a zero, then it is not a zero? Why is that a revelation?

And whether or not the IRS is "correct", is it not at least reason enough for caution?.

[Mike Preston]

I don't disagree with you.