Top Heavy Minimum and Comp Only While Participant

[Fred Payne]

Plan documents call for comp only while a participant. Two entered the plan at start of 4th quarter. They are included with others in an allocation group. Plan passes test based on Ratio Percentage Test using a 6% allocation and I have only including their 4th quarter comp.

Because Plan is Top Heavy, they are entitled to the top heavy minimum. 3% of full year comp is more than the 6% of the eligible 4th quarter comp.

Do I simply give them the larger of the two amounts without further testing? Or do I run the cross-test using a 3% allocation and their full year comp?

If I have to do the latter, the cross-test fails at 3%. I have to raise the allocation back to the 6% rate to again pass the cross test--an amount that is twice the THM.

Your comments are as always greatly appreciated.

[Tom Poje]

my understanding is that you can always use comp from date of participation for testing purposes (unless you have a poor document that says to use total comp or something silly like that)

it does not matter if ee received top heavy based on full year.

ee has met the gateway as far as I can tell since he has received a minimum based on comp from date of participation.

[Fred Payne]

Tom:

As usual, you had the answer. I spoke with an ERISA attorney just now on another matter. He confirmed what you said. In the test, I use only the comp while a participant but allocate the THM.

Thanks as always.

[Guest mmc]

The participants still need to get the difference between the Top-Heavy Minimum based on total comp and the 6% allocation based on participation compensation.

You still test on the 6% alloc, but the participants' allocation must be 3% of Total comp.

If you are using Relius and have the computed compensation screen correct for these two participants. It will perform the calculation.

[Blinky the 3-eyed Fish]

Mmc, you didn't read Tom's or Fred's post carefully. They realize that the greater of 6% on comp from date of entry or 3% of full year comp must be given. Yes, you can test the 3% allocation using comp from date of entry, as comp from date of entry is a definition that satisfies 414(s).

[Guest penman]

I spoke with an ERISA attorney just now on another matter. He confirmed what you said. In the test, I use only the comp while a participant but allocate the THM.

FWIW, and I realize you all probably know this, the way I read the Plan Year Compensation definition in tha a4 regs, I would say that you can elect to use comp as a participant. It is not that you must use comp as a participant. Selecting the testing comp period is independent of the comp period in the document.

In this situation you get helpful leverage from using the comp as a participant testing method/election. There are a couple of caveats though, one being that the method must be applied on a reasonably consistent basis from year to year and it can't discriminate in favor of HCE's.

So I wonder if this method was being used consistently and then one year an HCE entered mid-year and the test exploded, if you then switch methods to annual comp obviously to lower the HCE's EBAR and pass testing, is that discriminatory?

Am I not thinking enough? Am I thinking too much? Do you love this stuff or what?

[Tom Poje]

actually you must follow the terms of the document.

I believe the new Corbel documents all say

"any definition that satisfies 414(s)"

I think in previous years you had to be specific "comp from date of participation" or "total comp"

I don't know what other documents definitions are.

[Guest penman]

Tom,

For the contribution but not the testing methodology. I know you know this so I think I'm missing your point. What are you saying?

[Blinky the 3-eyed Fish]

There are a couple of caveats though, one being that the method must be applied on a reasonably consistent basis from year to year and it can't discriminate in favor of HCE's.

Penman, I don't agree with this statement. There are many mechanisms in the testing you can change year to year (assuming your document doesn't restrict you of course) - how 414(s) compensation is defined, what standard interest rate and mortality table to use, whether or not to test using otherwise excludable employees, etal. Do you have a cite that would help your position?

[Tom Poje]

penman:

for testing purposes ,you have to use a definition that satisfies 414(s)

now, there are a number of definitions that satisfy this requirement.

my reading of the documents is that they are more flexible than they used to be

in other words,for example a few years ago the document said 'use total comp' - not much leeway. now it says any definition that satisfies 414s

if I recall, the concept of 'consistency' from year to year applied to the determination of who was HCE - which would be in regards to something like rounding up or rounding down if you were determining who was in the top paid group.

[Blinky the 3-eyed Fish]

if I recall, the concept of 'consistency' from year to year applied to the determination of who was HCE - which would be in regards to something like rounding up or rounding down if you were determining who was in the top paid group.

That I agree with.

[Guest penman]

The cite is 1.401(a)(4)-12, the definition of Plan Year Compensation, see part (4).

[Blinky the 3-eyed Fish]

Good cite. I can't see anything to dispute it offhand.