Gateway Contribution for plan with a "terminated" participant group

[Guest Scrappy]

I was reading some of the other messages about a cross tested plan with a group for terminated participants and have a question. What if you have a profit sharing plan with no allocation or eligibility requirements. The plan has allocation groups with a group for terminated participants. The terminated participants get zero.

Does the plan need to make a gateway contribution on behalf of the terminees anyway since they are "benefitting" because of the plan not having an accrual requirement?

I was also reading where the plan could not use the average benefits test for cross testing in an instance such as this. However, if the plan was passing each rate group with 70% or more, then the plan would not need the average benefit test, right?

Thanks.

[g8r]

As long as they get no employer contribution (e.g., a top-heavy or ADP safe harbor contribution), they do not need to get the gateway.

I don't understand why you couldn't use the avg. benefits test. But, if you can pass using the ratio % you don't need the avg. benefits test. In many cases, giving NHCEs a 5% gateway causes a plan to pass using the ratio % test.

[AndyH]

The availability of the ABPT would depend upon whether or not the group of people who benefit (receive an allocation) are determined based upon a reasonable classification of employees, "based upon objective business criteria".

I would think that you could argue both for and against former employees being a reasonable classification. It is not a classification that the regulation speaks to as either being a yes or a no. I wouldn't use the ABPT without either an FDL on the issue or some written guidance. But that would probably be a conservative approach.

[Blinky the 3-eyed Fish]

To the original post, I think you are asking about using the average benefits test for nondiscrimination purposes. You have no issues there, because the reasonable classification test doesn't apply for average benefits for nondiscrimination.

However, what you need to be concerned about is coverage. If by not benefiting enough of the terminees, you fail to pass coverage using the ratio test, then you may not be able pass using the average benefits test. The thought is that by having these classes, you are effectively excluding persons from the plan and that exclusion may not pass the reasonable classification test.

How does the document language determine as to when the participants are assigned to the classes? It seems you could have situations where active participants are in one class and then switch to another class during the year when terminated. I am just curious since I have never seen a design like this. Why not just have a last day requirement?