Selective use of last day requirement

[Guest Dave Peckham]

Our client A currently has a 1,000 hours and last day of the year requirement to receive an allocation of the profit sharing contribution. Those requirements are waived if a participant retires at or beyond normal retirement age. The plan document also has new comparability language that says that each participant constitutes his or her own class.

Now client A comes to us and says that a partner who is retiring prior to age 59-1/2, which is the retirement age of the plan, wants to receive a profit sharing contribution in the final year.

Could we remove the last day requirement in the plan document, but still give a 0% allocation to any terminated participant OTHER than the partner who is leaving?

Terminated NHCE employees need not be given a top-heavy minimum contribution, and without a top-heavy minimum allocation, all NHCE terminees do not benefit for the year. (Due to mandatory disaggregation, I believe that this is true even if those NHCEs defer salary during the year.) Therefore, they need not be given the 5% minimum gateway contribution.

If we include those NHCE terminees as zeros in the 401(a)(4) test, and if we still pass, are we home free? Or have we somehow invoked "discrimination in operation" by giving, among terminees, only an HCE an allocation?

[austin3515]

So basically, you want to create an allocation group for terminated NHCE's, and then give them declare a "contribution" of $0. Sounds like a back-door last day rule. Even though you;re being very sneaky, I think it is actually pretty transparent. I can't say for sure, but I think there'd be rules against having different allocation conditions for HCE's and NHCE's.