SH 401(k)/Gateway/Otherwise Exlcudable

[Rob P]

We have a SH 401(k) plan that allows employees to defer after 3 mos., and requires employees to satisfy a 1-YOS requirement to receive a nonelective contribution (individual allocations).

Can we give employees who have worked less than the 1-YOS the 3% SH, and not the gateway minimum? Essentially, can we apply the otherwise excludable rule to employees with less than 1-YOS?

I thought I was clear on this rule until I read the ERISA Outline Book. [page 9.41 of the 2008 edition, paragraph 4.a.6.a]. Several of our employees have read this paragraph and it seems to contradict itself regarding the use of disaggregation when you allocate SH and/or TH mins. Can anyone clarify what he's saying?

Any input is appreciated.

[commishvp]

It depends on what the plan document (gateway amendment) says. I know the Corbel amendment our office uses allows us not to give the gateway minimum to the statutory excludable employees. I have seen other document providers treat the issue differently.

[Blinky the 3-eyed Fish]

The statutory rule is that if you disaggregate the otherwise excludable employees for testing purposes and you aren't testing the otherwise excludable group on a benefits basis (you most likely aren't because there probably are just non-highly compensated employees in that group), then you do not have to provide the gateway minimum to that OE group.

Of course check the doc to make sure it allows this.

[Rob P]

Thanks for the responses.

Our document is a volume submitter that does have the statutory exclusions language included. I am just concerned that because the SH contribution (same issue as TH minimum) is required, that I am still forced to give the gateway minimum regardless. As I mentioned, the ERISA Outline books seems to contradict itself on the issue.

[Tom Poje]

I asked King Sal about your comments (- or maybe its Emperor Tripodi - I get the titles confused) - and he responded in the following manner

(I happen to have a running gag with him about some of the typos I have come across over the last few years, so I have a foot (or at least a toe) in the door)

...........

Not sure where the confusion is. Here is how I would distill it.

(1) First identify the "plan" that is subject to coverage/nondiscrimination testing. In this case, the plan is the total of nonelective contributions, whether by PS allocation, gateway, TH, or SH 401k.

(2) Then determine how the "plan" in (1) is tested. If the plan is not subject to disaggregation, or permissive aggregation with another plan, then you test it accordingly. If the plan is subject to disaggregation (e.g., otherwise excludable employees - see last sentence of 4.a.6)a) on p. 9.41), then you test each disaggregated group separeately. If the plan, or a disaggregated portion of the plan, is permissively aggregated with anothe rplan that consists of employer nonelective contributions, then those aggregated plans are tested together.

[Rob P]

Tom - Thanks for the response and thanks for getting Sal involved, I’m impressed.

However, it's still not perfectly clear to me. Is Sal saying that if you are permitted to disaggregate, you are not required to give the gateway minimum to participants (who received the SH contribution and/or TH min) under the disaggregated "plan"? This of course assumes the plan document allows for permissive disaggregation.

[Blinky the 3-eyed Fish]

The otherwise excludable group DOES NOT have to get the gateway. (Assuming of course you aren't testing that group on a benefits basis.) It doesn't matter if they are getting TH or SH or a punch in the face or a bike for Christmas or a gold star or cavities or a bad haircut or a purple monkey dishwasher.

[Mike Preston]

Rob, you need to read what Blinky wrote (twice). The only way that those who are otherwise excludable end up with a gateway contribution being required is when the document has a flaw and attempts to craft language dealing specifically with the gateway requirement and does so in a way that ties the hands of the Plan Sponsor.

This has nothing to do with SH. Nothing to do with TH. In fact, it has nothing to do with otherwise excludable. In other words, you don't even reach the determination as to whether one might be able to test on the basis of excludable/otherwise_excludable because if the document flaw exists, it takes away the advantage of testing that way.

If the document is drafted in such a way that says: "Hear ye, hear ye....... If you cross test there shall be a minimum allocation to every NHCE in this 'ol plan equal to X% (for a definition of X, see Section Y which will tell you whether it is 5% or 7.5% or somewhere in between)" then you are stuck with the gateway contribution for everybody...period.

If you don't have that section in your plan, then you can arbitrarily decide to test excludable/otherwise_excludable (unless the plan precludes THAT, in which case it isn't just badly worded, it is POORLY worded). If you do test excludable/otherwise_excludable then the gateway is required for either or both of them based on whether either or both of them cross-tests. Period.

[Rob P]

Thank you all for the input. It is appreciated. I know I sounded a little dense on the issue. Your conclusions are my original understanding of the rule.

We just needed clarity since we started doubting ourselves the more research we did (there seemed to be caveats to everything we read). We recently got into a heated debate with the legal team of a major financial institution. Their prototype does not always for disaggregation. When we suggested to the client to change to our VS document (which does allow disaggregation), we were challenged and told by their attorneys that it would not make a difference. It’s tough to convince a client that a 10-person shop’s knowledge may be better than the attorneys for a 30,000+ firm.

Thanks again.