Gateway/Top Heavy

[Gilmore]

Hello,

I was hoping to get some thoughts on the following scenario:

A cross tested profit sharing plan's eligibility requirements are 1 year of service, 1000 hours of service and monthly entry. The plan year runs 11/1 to 10/31. The Plan also requires 1000 hours and employment on the last day of the plan year to receive an allocation.

The Plan is Top Heavy. The Plan uses compensation from date of participation for allocation purposes.

An employee is hired 9/25/2002. On 7/1/2003 they receive an unpaid leave of absence for surgery and do not return to work until November, after the plan year has ended. They did earn 1000 hours of service from 9/25/2002 to 6/30/2003.

Their plan entry date is 10/1/2003. Due to the leave of absence they do not have any compensation from date of participation.

First question is, if the employee is on an unpaid leave on their plan entry date, do they still become a participant in the plan?

Second question, if they are considered an employee for plan entry than is it logical to assume that they are an employee for the last day requirement and thus are eligible for an allocation?

Third question, if questions one and two are true, and the participant has no comp from date of entry, and the Plan is Top Heavy, are they due a top heavy contribution?

Finally, for nondiscrimination testing, if provided a top heavy contribution, how is the allocation percentage calculated if 414 comp (from date of participation) is 0?

Sorry for the length of the question, and thanks for any help.

[Tom Poje]

Not sure about your question if the person is considered 'active' as of the last day of the plan year.

However, top heavy is NOT based on plan entry comp. It is always based on the full year comp.

Gateway minimum can be based on date of entry comp.

Interesting scenario, if indeed eligible, ee receives the greater of 3% of total comp or the gateway - 5% of date of entry which = 0.

[Gilmore]

Tom,

Thanks for agreeing that it is an interesting scenario. And I appreciate your response because I know you are also well versed with Relius.

Our opinion was that the participant should receive the top heavy minimum (based on full year's compensation as you say) since it would be greater than 5% of $0 comp. Relius however, will not let us run discrimination testing with $0 plan entry comp.

Which than brought us to our next question, if her plan entry comp is $0, what is her allocation percentage for testing purposes? I believe we would normally be comparing her top heavy minimum to her plan year compensation, which again is 0.

Any thoughts?

Thanks.

[Guest RBlaine]

The computed compensation form in the Census has a place for "Prior to Entry" or something like that and says (only used for gateway testing). I haven't had this situation or used that, but it may be what you want.

[Tom Poje]

I would agree, even though ee may get contribution (top heavy) based on full year of comp you are permitted to use comp from date of entry.

there is no requirement to do as such, simply that you are required to use 414(s) comp. hopefully document simply says use any definition that satisfies 414(s)

The new Corbel documnets say that, the old ones use to be more specific, and went so far as to say from date of entry.

anyway, you can always override Relius, and simply enter in census, computed comp = total comp for the year and then run the test. If you pass, then it doesn't really matter, unless you want to argue the gateway minimum should be based on that comp figure. I don't think there is any guidance how to handle the scenario you describe.

well, I guess you could always test 'otherwise excludables' separately and this ee wouldn't show up.

[Mike Preston]

Treat the person as a zero or use 414s comp that is the whole year. Any attempt to use an EBAR of infinity will probably violate 1.401(a)(4)-1©(2). Probably.

[Gilmore]

Thank you all very much for your information. I believe we will provide the participant with the top heavy minimum and use her full year comp for testing purposes.

Thanks again!