401(k)/New Comp

[Gilmore]

Sorry to ask what I'm sure has been gone over before, but...

We have a 401(k) plan with no service requirement for deferrals and a One Year of Service requirement for non-elective, in addition to 1000 hour requirement and last day rule.

Profit sharing is cross-tested.

The plan is not passing the ABT due to the increase in ees who are eligible to defer.

I have been reading a lot of the threads with regard to restructuring the plan; we have no experience with this method with cross-testing and probably have some really basic questions.

We are using Relius. Choosing the option to test statutory exclusions separately allows the test to pass. The right ees seem to be excluded, however is there anything that I need to watch out for?

I also have a top heavy issue. I believe I read elsewhere that if I restructure the plan than those statutorily excluded need only receive the 3% contribution?

The plan was previously amended to allow for the top heavy only ees to receive the gateway however the amendment did not mention anything about restructuring. Is a further amendment needed?

Thanks very much for the assistance.

[Blinky the 3-eyed Fish]

You should be safe with the statutorily excludables. Even if there happened to be an HCE in there, all is well because all will receive 3% and no nondiscrimination testing is needed.

This answers your second question as well, as the statutorily excludable employees are not required to get the minimum gateway contribution as long as their portion of the plan is not cross-tested.

The plan does not and should not have language in it on how to perform cross-testing. The only thing to watch out for is if the plan DOES have language that precludes you from performing the testing in a certain way.

[AndyH]

Everything Blinky said is right, but I'd just add that you cannot arbitrarily decide not to give a gateway contribution to certain people. You must of course follow the document. I mention this because of the amendment that you referenced; what that amendment stipulates is unclear.

[Blinky the 3-eyed Fish]

Ah yes, the amendment that allows for those receiving the top heavy to in turn receive the gateway minimum must specify that those that are statutorily excludable do not have to receive the gateway. Without that exclusion you would have to give the gateway contribution to all who benefit.

[Gilmore]

Thanks for the help.

Actually the amendment reads:

"In any year that this Plan is Top-Heavy, each Non-Key Employee entitled to a Top-Heavy Minimum contribution shall receive a Top-Heavy-minimum contribution equal to the allocation received by the Non-Highly Compensated Employees benefitting under this Addendum."

Am I correct in thinking that this amendment could actually give more than the gateway if that is what the other NHCs are receiving?

[Blinky the 3-eyed Fish]

It looks to be the case. An additional fault with this language is that it references non-keys are to receive the additional allocation, when it should reference nonhighlies.

[Gilmore]

Ok, putting the top heavy issue aside for the moment,

Is it proper to exclude statutory exclusions from the ABT test? I just talked to the company that provided the amendment and when I described the situation they said it was their opinion that even though the nonelective portion of the plan is being restructured, the statutory excludables need to be added back in to the ABT. That is what caused the test to fail in the first place.

Now I'm really confused.

[Blinky the 3-eyed Fish]

My opinion is that the statutorily excludables are not included in the ABT. Obviously, others have different opinions.

[Gilmore]

Removing the excludables from the test is also the opinion of Relius as well, because that is what happens when that option is chosen.

I'm a little leary of relying on the results just because the right buttons are pushed.

When you say that opinions differ, can I assume that this is an area where there is no clear guidance?

Thanks again.

[Gilmore]

I think I am making this harder than it actually is because I am confusing terminology.

I am not restructuring the plan, I think I am simply disaggregating the plan to test separately those participants who did not meet statutory eligibility requirements.

So those employees who have not met statutory requirements and are eligible solely because of the less restrictive entry requirements for the 401(k) portion of the plan can be tested separately for the ABT?

Am I back on track?

[Tom Poje]

You sound correct on all counts. The otherwise excludable rule is optional from one year to another as well. However, if you do indeed use this option, you must also use it for 410 (B) testing. I doubt it would make a difference in this case, but one never knows. I have seen it make a big difference in regards to ACP testing.

You are correct about your statement 'pushing the right buttons'.

For instance, Relius has an option for testing on SSRA, but since testing is suppose to be on the plans NRA that button should be rarely used, unless the document specifically called for it. And even then, you have some BRFs to worry about.

The rate banding is another one where I heard people just simply 'click' and for the most part, its default method is most likely in violation of the regs about favoring HCEs.

[Gilmore]

Tom, Blinky

Thanks for your input. I hope you don't mind my continuing this line of questions. I have been going back over the postings on this topic and also reading and re-reading the ERISA Outline Chapters 8 and 9.

Tom, I understand that if the plan is disaggregated for coverage than the rate group testing must be tested separately as well. And you are correct, in this instance it still passes 410(B).

First, just so I'm clear, the ADP or ACP test would have no bearing on whether or not I was disaggregating for the nonelective "plan"?

Second, there is one participant who met the plan's eligibility for the nonelective (quarterly entry dates) however did not meet the statutory requirements (semi-annual entry) and is therefore in the otherwise excludable group. This person terminated during the year so did not receive an allocation. However, what if this participant had not terminated and was to receive an allocation. How much does he have to get? There are no HCEs in the excluded group so the excluded group would not need cross testing so does he not need the gateway? And if he does not need the gateway, once again, how much should he receive, assuming the plan is not top heavy?

Sorry if this is a really obvious question.

[Tom Poje]

my understanding is that the ADP tests would have no bearing on whether you disaggregate the nonelective portion.

as regards your other question, I guess that depends on your document.

If I have a class plan, and all NHCEs receive x%, then that individual receives x%. If the document further states no NHCE shall receive less than the gateway minimum, then I would read that as saying the ee receives the gateway as well. If the document was worded differently, e.g. in no case shall the contribution cause the plan to fail the gateway, then I would hold he would receive x%, because the otherwise excludable group does not have to receive the gateway

[Mike Preston]

And just to continue Tom's line of reasoning, which of course I agree with, if the document has complete flexibility to determine what percentage this person gets, that person's percentage is not restricted by the Code or regs. Hence, if the plan sponsor wanted to allocate 1%, that would not be a problem as: (a) this person does not need to get the gateway; and (B) as an NHCE being disaggregated into a testing group that has no HCE's, no discrimination can result.

[Gilmore]

Thanks guys, I appreciate your help.