Top heavy plan with early participation...

[jaemmons]

Plan is top heavy for 2003. Eligibility for 401k is immediate but a two year wait for PS.

Top heavy was given to all ee's who were eligible for 401k. This resulted in minimum gateway allocations above the 3% top heavy minimum. Can a plan at this point carve out the otherwise statutorily exclused ee's (i.e.-age 21 and 1 yos) and only provide minimum gateway increases to those who would have met the 1 year and age 21 during the plan year? If so, does the plan document need to contain language to limit top heavy minimums to only those who meet IRC 410(a)(1)?

[Blinky the 3-eyed Fish]

The answer is yes to your first question depending on your document language of course.

As for your second question, I wouldn't put it quite that way. It would be that the gateway language that allows for the allocations to be increased is there. Thus, any 21/1 participant would get the TH minimum and then be brought up to meet the gateway requirement by this language.

If you don't have this gateway language in your document now, then you have no mechanism that I see that would allow for the 21/1 employees to get the gateway. I smell what 1.401(a)(4)-11(g) is cookin'.

[jaemmons]

Thanks for the reply. I have another question. The profit sharing contribution has a two year wait. For those participants who do not yet meet the two year requirement but have a year of service and received a top heavy minimum, is their allocation rate for minimum gateway purposes based on full year comp (since this is what their top heavy benefit was based) or can it be determined based on the participation compensation from "theoretical" entry date (i.e.-entry date if they had worked one year). I remember reading something which leaned toward the latter of the two, but I cannot remember where I read it.

Any thoughts??

[Tom Poje]

that is document driven by the gateway language. it can be from date of particpation, so you get the following (if I remember correctly)

1. 1/3 rate based on plan def of comp

2. 5% based on date of entry

but not less than

3. top heavy based on full year comp

[jaemmons]

Tom,

With the PS having a two year wait, there is still confusion as to whether or not the allocation rates for those who only received top heavy minimums is based on their comp from their theoretical entry date or allocation comp for top heavy purposes.

I thought that the entry dates are only to be used to determine who meets the 21/1 yos requirement during the year for 410b purposes, and not to determine allocation rates under the cross-testing regulations. Allocation rates are then determined based on the compensation used for the specific allocation (i.e.- top heavy uses full year and profit sharing uses from date of entry). Am I wrong with this analysis?

[Blinky the 3-eyed Fish]

Tom, but keep in mind jaemmons is asking this question concerning people without an official entry date in the nonelective portion of the plan yet.

Jaemmons, I would be curious where you read anything on this. I would say that a theoretical entry date would not be sufficient enough to get around the definitely determinable benefit criterion. Instead I believe special document language that assigns an entry date for gateway purposes when otherwise excludable testing is used would be required to address this situation.

[jaemmons]

Blinky,

My logic is based on what compensation is used for adp testing purposes when you have statutory exclusions. The entry date is used to determine who would be included in adp testing. If a participant has a theoretical entry date past their actual entry date, you still must use compensation paid during their period of actual participation (assuming the plan uses this definition for adp) for determining individual adr's. Thus, even though you can use the statutory exclusion to determine who is in your "minimum gateway allocation group", their individual allocation rates should be based on the compensation used for the respective allocation (i.e.-profit sharing, top heavy). Am I wrong in this analysis?

[Blinky the 3-eyed Fish]

I didn't understand what you meant by your last sentence.

Let me summarize what I am saying. For those 21/1 participants, when determining what compensation to use for meeting the gateway requirements, I am saying that without specific language in the document that assigns these people an entry date for gateway purposes, that the gateway should be based on full year's compensation. If you have the specific language, then I believe it would be okay to limit the gateway amount to compensation from that entry date.

[Tom Poje]

I'd agree with you Blinky, stopping short of special language I would hold you have to use total comp. that is the type of plan I would request a determination letter on any language included.

Of course, based on what I read in other threads, if your document doesn't address that issue then it sucks.