Easy question for some

[FJR]

Cross-tested 401(k) SH plan. Three groups, 2 of which define the person by owner and year born. The 3rd group is all others. Plan is TH

After running eligibility we have 4 eligible EE's. 2 owners and 2 NHCE's. The one owner max's out by contributing 401(k) and the rest PS. The other owner has $0 401(k) and wants to get $0 PS. Now we are left with the 2 NHCE's and here is the question. One NHCE has termed with <500 hrs. Give that EE the 3% SH only? I get confused with coverage, given this person is not included.

Thanks.

[AndyH]

There are a couple of points to consider.

First, what, if any, requirements does the document stipulate are required in order to receive a contribution, i.e. is there an hour requirement or last day requirement?

Always start by focusing on what the document says.

Second, what contribution as a percent of pay does the owner who wants to max out need to get?

[Archimage]

You will also have to give the NHCE the gateway minimum.

[Guest penman]

......unless the eligibility requirements are less than the statutory minimum so that that person can be dissagregated and avoid the gateway min (if any contribution is required at all).

[AndyH]

unless the plan language precludes that option.

[FJR]

Let me clarify:

Plan Doc has 1,000 hrs. last day requirement.

The contr. rate for the owner who max's is 13.66%

Eligibility is normal 1 Yr. dual entry.

The EE in question is the one that Termed with less then 500 hrs. Also this EE is one of a total of two eligible NHCE's

Thanks.

[Guest seissler]

The terminated NHCE is benefitting under the plan, with respect to nonelective employer contributions, because of the 3% safe harbor contribution. Therefore the NHCE is entitled to the gateway contribution, which is the greater of 1/3 of the max HCE or 5%. So if the max HCE has the 3% safe harbor plus 13%, then this NHCE gets 5% total ( the 3% safe harbor plus 2%).

[AndyH]

Right.

[FJR]

Doesn't the gateway pass with 4.55%?

[Archimage]

Nope, but it would pass at 4.5534%.

[AndyH]

Archimage beat me to it.

[FJR]

Thanks Arch,

Just clarifying what seissler posted.

[FJR]

So in a Safe Harbor Cross-tested Plan, when can you apply the 1,000 hours and last day requirement? Seems like as long as someone benefits by getting the 3% SH contribution, that would always entitle them to the gateway, whether they are employed on the last day or not?

[AndyH]

Unless you can exclude somebody by separately testing those who fail to meet the maximim age and service conditions, you must give the gateway to anybody who benefits under the plan. Since gettting the 3% is benefitting, such a person must receive the gateway.

Somebody who terminates with less than 501 hours is not statutorily excludable unless they are not benefiting.

[FJR]

so there is really no advantage of having the last day or 1000 hrs. rule under this type of arrangement? Please let me know advantages for design purposes.

thanks for all your input.

[AndyH]

In hindsight, for this particular year, it makes no difference. But how do you know that next year the other HCE might not want $40,000 so the gateway becomes higher than 5%? If not for the last day or hour requirement, you'd have to give these people the full percentage allocation, not just the gateway.

[WDIK]

which is the greater of 1/3 of the max HCE or 5%

so the gateway becomes higher than 5%

I realize that all the blood may have rushed from my brain to my stomach to digest lunch, but I thought that the gateway could be satisfied with a 5% allocation, even if the greatest HCE allocation rate was in excess of 15%.

[AndyH]

Yeah, sorry, I mis-spoke and re-reading it my comments makes little sense.

What I was trying to say is that you may need (or want) to give the rank and file more than 5%, not to pass the gateway but to pass the test, and you might not want to do this with terminated people. If you had a last day or hours requirement, then you could limit the "gateway only" people to 5% while giving others more.

Thanks for the followup.

[Archimage]

It is advantageous if the minimum contribution for those passing is at say 6%. Only those that worked 1000 hours, last day would get the 6% and everyone that didn't meet the allocation requirements would only get the gateway minimum.

[Tom Poje]

if plan has a last day rule, then no one has accrued a benefit until the last day.

this generally means you could amend the formula

e.g. suppose you had one class = owners

you discover they have hired the son.

since young son is an owner your cross test will fail miserably unless you amend.

if you only had 1000 hour stipulation, once you get passed mid year it would be too late to fix the current year.

[FJR]

Correct me if I'm wrong, we are only talking about this issue of last day. 1,000 hrs. because we use the 3% SH. If this was just a straight 401(k) no SH, Profit Sharing plan, then we would be able to exclude completely w/o giving the gateway?

In that case, the individual is not benefitting?

[Tom Poje]

gateway only comes into play if you want to cross test