Cross tested top heavy plan

[Guest cynthiar]

I have a cross tested plan which is also top heavy. This plan allowed a special entry date of 11/01/03 for deferrals and entry into the profit sharing plan.

It is my understanding the final regs (1.401)(a)(4)-9b(b)(1)(vi)(b) made an important clarification of what comp could be used for the one-third and the 5% test. That being at least 5% of section 415 comp, measured over a period of time permitted under the definition of plan year comp, thus allowing the 5% test to be satisfied by limiting comp to the portion of the plan year that the participant was eligible.

If this plan is top heavy and participants are getting a top heavy allocation of 3% on full year comp, can you test the allocation on mid year comp for the 401(a) general test as well?

[AndyH]

Yes, you need to provide only the greater of the top heavy minimum requirement (for the entire year) or the gateway requirement (which can be limited to the period of participation).

[Disco Stu]

I've been interested in this topic as well. I think I'm satisfied as to calculating the gateway amount and the top heavy minimum. I'm curious which is the appropriate comp to use in determining the benefit percents for the cross testing though. Here's my example.

The calendar year plan is top heavy. The gateway ends up at 5%. I have a number of participants who though employed for the enitre year, entered the plan on 12/1. Obviously the 5% gateway on their comp for that last month of the year does not satisfy the top heavy minimum, so they receive a 3% allocation on their entire year's comp.

I'm fine with everything up to this point.

The problem I have is dividing the total contribution by one month of comp to come up with a benefit percent for the cross testing. It's a very large percent. I know that the regs are pretty clear that you use the comp for the period of the year that the participant was eligible, but the top heavy minimum is based on full year comp. It seems like this is taking unfair advantage.

[AndyH]

Well, this "special entry date" thing is looking like the latest fad.

The rules say you can use a full allocation divided by a shorter period of participation, but we should remember that 1.401(a)(4)-1©(2) says:

"Interpretation.

The provisions of sections 1.401(a)(4)-1 through 1.401(a)(4)-(13) must be interpreted in a reasonable manner consistent with the purpose of preventing discrimination in favor of HCEs."

Clearly there is room for interpretation, but it seems to me that if this "special entry date" is being provided merely to skew test results then it may not fly. And Blinky or somebody else recently mentioned that the IRS has caught wind of this as a trick.

[Blinky the 3-eyed Fish]

The government representatives at the LA Benefits Conference mentioned specifically the "one-day employee", meaning an employee is paid $100 or so and given a $100 accrual to jack up the cross-testing results. They didn't address specifically the permissibility of having entry dates near the end of the plan year, but I think the theme was to give notice they are on to such ideas designed specifically to provide less benefits to NHCE's and are considering their options.

[Mike Preston]

Pigs get fat and hogs get slaughtered.

[Tom Poje]

Mike:

what about 3 eyed fish?

........

but seriously. it is abusive action of using these entry dates so late in the year that put cross tested plans in such a bad light. might s well have a 412(i) plan.

[AndyH]

Someone needs to invent a "springing entry date".

Err, or should that be a "swinging entry gate"?

But I still like the 4:15 entry time idea.

[Disco Stu]

I'm not sure I agree that the late entry date is abusive. The plan has monthly entry dates. Some people enter 12/1, others 3/1. Even for someone who entered 7/1, a 3% top heavy minimum would typically be higher than a 5% gateway.

Common sense tells me that using one month of comp in the cross testing seems aggressive...but if that's abusive, what isn't? Monthy entry dates is a perfectly reasonable plan design. So is quarterly, and you'll have the same issue there. It just isn't as exaggerated. Is the answer to use a full year's comp in the test?

[AndyH]

No, 12 monthly entry dates would be ok with me. But January 1, July 1, and December 31 might not be.

[g8r]

Maybe the Treasury can carry the proposed targeted QNEC rules to cross-testing. Wouldn't that be fun. : ) (I can't get those clickable smilies to work)

Arguably the entry date could have been carried to the first day of the next plan year. Letting the person in on 12/1 gives the person a 3% TH. That's a good thing for society (just like a targeted QNEC is providing a benefit to NHCEs).

I agree, pigs get fat and hogs get slaughtered... and I can't think of any analogy for three-eyed-fish.

[Mike Preston]

Boned, basted and barbequed?

[jquazza]

Is someone getting remorse suddenly. Do you like the Bush ERSA plans or what? Until the IRS modifies 414(s) to look more like 415, I am totally ok.

And the 3eyed-fish gets skinned, skimmed and skewered! Then thrown in the bouillabaise...