Cross testing, 401(k) SH, top heavy & gateway

[pmacduff]

I have searched the boards and cannot find my exact scenario and I need HELP! Cross-tested safe harbor top heavy plan using safe harbor match.

Eligibility: 12 months of service

1000 hours

age 21

dual (Jan & July 1) entry dates

Calendar year plan

Employee: hired 03/23/2002 & is over 21

2002 worked approximately 400 hours

2003 worked approximately 1000 hours

Client allowed participant to defer late in 2003 (about 1 month) and gave her safe harbor matching contributions on those deferrals. Her actual entry date should have been 01/01/2004. I understand that we can amend the plan and change the eligibility for deferrals to fix that error (we would leave the PS eligibility 1000 hour YOS, age 21, dual entry). The plan is top heavy. Does she need to receive a top heavy benefit for 2003 even if she will not enter the PS portion until 01/01/2004? I think since she is a participant and did not terminate, I must provide her with top heavy benefit. I'm pretty sure I can also apply the SHMAC she received toward the total top heavy contribution. Now - let's move to the cross-tested piece. It is my understanding that since she received a SHMAC and will be receiving a 3% top heavy, she will be required to receive the minimum gateway...is this correct?

Any help is greatly appreciated and I'm sorry if the topic is a repeat........

[jquazza]

Amending the plan eligibility retroactively to fix one participant account might end up costing the sponsor a pretty penny. What about other employees who were excluded from deferring but would have been eligible under the new eligibility provision? The sponosr would have to contribute a QNEC for all these folks, in the amount of the NHCEs or HCEs ADP average, depending on which category they belong (and if you have any HCE who gets a QNEC, you might have some nondiscrim issues as well.) Plus, they might be entitled to other contributions...

It might be easier to just consider the participant ineligible for 2003 and treat her deferrals as ineligible contributions. Forfeit her balance and let the employer make her whole outside of the plan. That would actually be the IRS preferred method of correcting such operational failure, but not the employer, especially if you jump over into a new year, you have issues with W-2s etc... Some administrators actually process corrective distributions.

[pmacduff]

This Employer is VERY small. The employee in question is the only one not already a participant so there aren't issues of many other eligibles or future eligibles. (Employer has very little turnover.) The Employer is not against giving this participant a gateway allocation, I just want to be sure that she is entitled to top heavy and/or gateway $ under the scenario in my original post. Any thoughts?

[Blinky the 3-eyed Fish]

I think you could clearly avoid giving her the gateway by disaggregating otherwise excludable employees for testing of the nonelective contribution. I do think however, that she must receive the TH minimum if you are proposing an amendment to the plan to make her eligible.

[pmacduff]

That's exactly my thought and what I did Blinky. Now - when I run non-discrim tests in Relius, is there any way to get an accurate picture? She is showing up with her 3% in the 401(a) testing and it is failing. Am I doing something wrong? I checked the "statutory exclusions" box, but it seems like Relius is still considering her in all the tests. HELP!

[Tom Poje]

check her status in census (benefits/contributions) to make sure the box is checked 'statutory exclusion'

[pmacduff]

Thanks Tom - that worked!!! I should have thought to check that...sigh...it's Friday and almost over.....

[K-t-F]

Call me "green"... you can amend a plan retroactively? Wouldnt that be like establishing a plan after the year end?

[Tom Poje]

PATA:

if a person is allowed to defer before meeting plans eligibility requirement, the self correction amendment is to change the eligibility requirements for ANY person falling into that category - not just the person in question. Its part of EPCRS

[K-t-F]

I understand.... I think I may change my name to "Kermit " and use his avatar until I shed my green (in addition to learning to look outside the box)