Terminees with > 500 hours in cross tested plans

[perkinsran]

We have a client that excludes terminated employees in the year end cross tested profit sharing allocation. They do however receive the 3% safe harbor (401k cross tested plan) since it is funded each pay and there are no restrictions.

If we pass the 410b coverage tests with these employees excluded, do we have to bring them back in when testing for 401a4 for the cross tested?

[Tom Poje]

Something is amiss.

the only terminees that can be excluded from coverage testing would be terminees with less than 500 hours. And only if they receive zippo. (I am not referring to the 401k portion of coverage, of course)It doesn't matter whether plan is safe harbor or not.

If you have a terminee with more than 500 hours he is includable and either benefitting or not benefiting depending on your plan requirements.

Since the SHNEC goes to all ees, your coverage for nonelective portion of the test is 100% vested. all you care about in coverage is if someone got something, not how much.

Part 2:

nondiscrimination.

Basically same as above except now you are concerned with how much someone gets rather than simply did they get something.

excluding terminees with less than 500 hours is entirely optional.

if plan is safe harbor, then terminees who are excluded from the remaining profit sharing allocation MUST be bumped up to the gateway minimum. Make sure document contains such language. I believe Corbel has a snap on amendment to cover this, if that is the document you have.

[Blinky the 3-eyed Fish]

One of the requirements for excluding those terminees with less than 500 hours is that they do not benefit under the plan being tested. In a safe harbor plan where the nonelective is being provided, this exclusion can't be used because all benefit. You are doing the coverage testing incorrectly.

Tom won the race and has a more thorough post.

[perkinsran]

Thanks for the reply, but lets look at some numbers and make sure we have this correctly. 10 employees, 1HCEs and 1 NHCE who terminated with more than 500 hours. Since all employees receive the 3% safe harbor, do we have 100% coverage for PS or 90% coverage for PS. In other words, is the contrihbuion for Safe Harbor and PS combined?

Whay we are trying to do is when an employee leaves, cash him out without a subsequent year end contribution. Lets say at year end the company makes an additional 2% contribution for NHCEs. DOes the employee that terminated have to receive that if the plan requires a last day of employment? It seems clear from your earlier response this employee must be included in the 401a4 analysis for the cross tested piece.

[Tom Poje]

for coverage you are at 100%. A safe harbor is still a nonelective contribution.

By the way, the answer would be the same if one ee received top-heavy only andeveryone else received more.

Now for the nondiscrim testing. each and every NHCE, no matter how much nonelective they received, must receive the gateway minimum if the plan is to be crosstested. Doesn't matter what eligibility conditions you have.Thus if the HCE receives more than 9% nonelective(total, including the safe harbor), you must give the terminated NHCE at least 1/3 the rate the HCE received up to 5%. You must also follow the terms of the document. If the document doesn't call for this additional contribution you must put in a corrective amendment for the year.

If the plan is not cross tested, then you would not have to bump up the amount.

[perkinsran]

Thanks that's what I thought from the earlier post. Not what I wanted to hear but it makes sense.