Definition of Plan Year Compensation in a dual-entry top-heavy 401(k) plan

[Guest Dave Peckham]

Top-heavy 401(k) cross-tested plan PYE 6/30/04 has no age or service requirements and dual entry dates: first of the month following date of hire for salary deferrals; and January 1 or July 1st following date of hire for profit sharing.

The plan's definition of compensation excludes compensation prior to a participant's entry date.

Employee A was hired 10/1/03, enters the plan for salary deferral purposes on 10/1/03, and enters the plan for profit sharing purposes on 1/1/04.

Employee B was hired on 5/28/04, enters the plan for salary deferral purposes on 6/1/04, and does not enter the plan for profit sharing purposes until 7/1/04, the first day of the following plan year.

Assume that trying to treat the excludables as being in a separate plan does not work, because we need these short-service employees to pass cross-testing.

Both Employee A and Employee B need to be given a top-heavy minimum contribution of 3%, and since we can't pass testing on a separate plans basis, we also need to give A and B the gateway minimum 5% contribution.

5% of what? What plan compensation are we allowed to use? For Employee B there is only one choice: 6/1/04 to 6/30/04, the period during which B participates for salary deferral puposes.

Employee A is the question: Must we use 10/1/03 to 6/30/04, or can we use 1/1/04 to 6/30/04 as the period of plan participation?

[Tom Poje]

the 5% is based on plan comp, and can be from date of entry 1.401(a)(4)-8(b)(1)(vi)(B)

however, ee must still receive at least 3% top heavy which would be based on total comp which as a result could easily be greater than the 5% gateway

[Blinky the 3-eyed Fish]

Let me try and expand a little. What I think Tom is saying is that the gateway can be based on the entry date to the nonelective portion of the plan even though the entry in the 401(k) portion is sooner. This is easily followed by the regs. First go to Tom's cite then to here:

1.401(a)(4)-12 definition of Plan Year Compensation

(4) PERIOD OF PLAN PARTICIPATION DURING THE PLAN YEAR.

This period consists of the portion of the plan year during which the employee is a participant in the plan. This period may be used to determine plan year compensation for the plan year in which participation begins, the plan year in which participation ends, or both. This period may be used to determine plan year compensation when substituted for average annual compensation in section 1.401 ( a )( 4 )-3(e)(2)(ii)( A ) only if the plan year is also the period for determining benefit accruals under the plan rather than another period as permitted under section 1.401 ( a )( 4 )-3(f)(6). Further, selection of this period must be made on a reasonably consistent basis from plan year to plan year in a manner that does not discriminate in favor of HCEs.

Note the definition of Plan in the same section. It clearly demonstrates that Plan is determined after mandatory disaggregation.

PLAN.

Plan means a plan within the meaning of section 1.410(b)- 7( a ) and (b), after application of the mandatory disaggregation rules of section 1.410(b)-7© and the permissive aggregation rules of section 1.410(b)-7(d).

Now, with Employee A, his 1/1/04 entry date to the nonelective means that you are comparing 3% of comp from 10/1/03-6/30/04 versus 5% of comp from 1/1/04-6/30/04. Employee B is different though because he has no entry date for the nonelective portion of the plan. I would hold that you need to give 5% on comp from 5/28/04-6/30/04. Here is a prior discussion on that topic.

http://benefitslink.com/boards/index.php?s...=24938&hl=entry