Gateway between MP, PS with differing eligibility

[mwyatt]

Consider the following:

Company sponsors two plans:

Plan A) Money Purchase Plan with 2-year eligibility, end of year requirement. Flat % of Comp is over 5%.

Plan B) 401(k) Profit Sharing Plan; PS component has 1-year eligibility, end of year requirement, and is cross-tested with two Classes (Partners and non Partners). 401(k) component has immediate entry.

Oh, and by the way, these plans are top heavy. Client has been "topping up" the PS contribution for those participants who haven't yet satisfied eligibility for Plan A by making additional PS deposit for them under Plan B's PS component.

My question concerns the Gateway for 2002. Ignoring the Gateway requirement, the desired result to get partners to $40k is a Profit Sharing contribution of approximately 6% for Partners and 1% for non-Partners. If Plan A didn't exist, clearly the non-Partner PS contribution would have to be 2% to the non-Partner class.

How does the Plan A contribution fit in to satisfying the Gateway (if even allowed)? I'm a little concerned in that there exists a certain segment (non-Partners with 1, but not 2 years of service) that isn't getting the MP contribution. Document just states that the contribution is allocated among classes by compensation; don't see where there would be flexibility to "top up" this segment to 2%.

Any suggestions?

[AndyH]

I think you have 2 choices and you have to see which is more efficient:

1. Increase the PS contribution for non-partners to 2% or

2. Aggregate the two plans and then do an 11(g) corrective amendment increasing the MP or PS contribution to the level needed such that each "benefitting" NHCE gets at least 1/3 or 5% between the two plans.

[Belgarath]

I'm going from memory here, so I'd take this with a large dose of caution... If the plans are permissively aggregated under 1.410(b)-7(d), then I think you are ok to consider your money purchase contribution toward satisfying gateway. Conversely, if not permissively aggregated, then you couldn't count it. As far as the "topping off" in the PS plan where necessary, this could be a problem if the plan language does not allow it. Technically, I suspect you'd have to calculate a contribution where the "regular" allocation would get you up to the gateway minimum. There was some talk a while back about the IRS coming up with some form of specimen amendment for the "topping off" approach, but I haven't heard anything more about it.

[mwyatt]

Thanks for the responses. One other point to confirm. I think that if I take into account the MP plan (and for the sake of argument let's say that this contribution is 9%), then the amount of my calculated gateway should be based on the combined contribution also, so that the new gateway would be 1/3 of 9% MP plus the 6% PS, or 5%, rather than just the gateway of 2% calculated on the 6% PS contribution alone.

[AndyH]

Yes, that is right. That is why you need to look at each approach.

[mwyatt]

Well, I did the testing including the Money Purchase Plan (which is 5.7%/5.7% integrated BTW) and reached an interesting result. Due to the excess contribution under the MP plan, it actually was MORE expensive to include the MP plan in for testing in order to pass the General Test. Kind of an interesting result (even after imputing disparity on the MP and PS contribution, but not the deferral).