Non Discrimination

[Gary]

A small plan is implementing a cross tested plan.

It provides for immediate eligibliety for 401k deferrals and 21&1 for the 3% 401k safe harbor, and Profit Sharing plan.

The plan is effective 1/1/07.

An employee enters the SH, and PS plan on 7/1/07 (i.e. the 1/1 or 7/1 on or following 21&1).

The employee has $50,000 in compensation for 2007 and $25,000 in compensation from 7/1/07 through 12/31/07.

Say a total employer contribution of $10,000 is made for the above employee.

For his non discrimination testing compensation is it acceptable to use $25,000?

As a result his allocation percent would be 10,000/25,000 or 40% and not 10,000/50,000 or 20%.

Of course it would apply this way for all employees.

It seems 1.401(a)(4)-12 allows for this.

I also would then apply the 25k with regard to the covered compensation for computing the maximum deduction.

Thank you.

[Mike Preston]

Nobody knows, that I am aware of. Sure, folks have opinions. But there isn't a cite that one can point to that definitively says one way or the other. Of course, you could split into two separate plans and definitely be able to do what you describe.

One nit: you can use the $50,000 in the max deductible calculation.