Another gateway question

[Guest dietpepsi]

This is probably a common question. We have a wave plan that also has a pay to pay allocation only given to those active on the last day of the plan year. After all was said and done they did not pass the general test as contributions. They do pass as benefits. However, they don't pass the gateway because they can't meet the 1/3 test and one benefiting participant did not receive 5%. Is it acceptable to do a corrective amendment to bring the one person up to 5% if a reasonable business criteria can be found for giving this employee a Qnec?

Thanks

Suzie

[rcline46]

Lets see how much trouble I can get into here.

I don't know what you mean by a 'wave' plan, so I will ignore that part. Your year end testing went something like this:

410(b) 70% test - FAIL

11(g) Amendment to add enough people to pass 70% - Not required in your document (PLEASE CHECK!!!!) and client said no.

410(b) ABPT test - PASS

If you formula is comp to comp, you stop here because it is a Safe Harbor formula, and you do not need rate group testing.

BUT - if pay to pay as you explained - how did someone end up under 5%??

[AndyH]

So is this an old "[new] wave plan"? I'm equally in the dark about what that is, although I did see if defined somewhere once.

I'm playing on words about the document. What does the document say about the gateway rules? Nothing? The answer to the original question is probably yes, but I'd want more specifics about what the plan says and what tests are failing.

[Guest dietpepsi]

Sorry, I didn't know WAVE wasn't a common industry term. The allocation is based on age and would require a general test in and of itself. However, the contribution can be predetermined to make sure it will pass the general test, like a comparability plan. The catch with this plan is that it has one allocation based on this age formula and another formula that is comp to comp, so when all was said and done, it didn't pass the general test as contributions and one person was under 5%. Since some of the older people are receiving very high allocation rates, it won't pass the 1/3 test. If it was the age allocation alone, it would pass the broadly available exception, but with the extra pay to pay allocation, I don't think that applies.

Did that clear things up any? Thanks!

[Blinky the 3-eyed Fish]

Prepare an amendment under 1.401(a)(4)-11(g) and give the guy 5%. Problem solved. I would recommend this amendment one that will allow the plan to allocate the gateway minimum in case the plan must test on a benefits basis in the future. That way you will be covered in future years under a similar situation.

[Lynn Campbell]

Isn't it true that an age-based plan normally does not have to make the gateway contributions???

[Blinky the 3-eyed Fish]

Si, senorita.

[Guest dietpepsi]

Yes Lynn, I agree also. The problem is they have two allocations, one is age weighted and the other is pay to pay. I think since they have two allocations it takes them out of the exception.

Thanks all.

[Mike Preston]

It does, indeed, unless the pay to pay is a specific amount and the combined amounts still satisfy the test. Unlikely, but possible.