Cross-Tested Formulas in Prototype Plans

[Laura Harrington]

Assume a 401(k) safe harbor plan utilizing the 3% nonelective feature. The

plan wishes to restate to a prototype EGTTRA document.

The plan has 1 HCE and 2 NHCEs.

The plan divides employees into two groups for the profit sharing

allocation: HCEs and NHCEs.

Under the rules described in LRM #94, this plan can only have one NHCE

allocation rate if they adopt a prototype plan.

The plan also has an end of year requirement on the profit sharing

contribution. NHCE #2 terminated during the plan year.

The HCE revceives a 15% contribution.

NHCE #1 receives an 8% contribution.

NHCE #2 is not technically eligible for the profit sharing, but because

they benefited due to the safe harbor nonelective, must receive the minimum

allocation gateway. Therefore, they receive a 2% contribution to satisfy

the minimum gateway.

Would this plan violate LRM #94? Or should the "allocation rates" for this

purpose be determined prior to the additional allocation necessary to

satisfy the minimum gateway?

Assume NHCE #2 was not eligible for the minimum gateway because they were

an otherwise excludable employee under 1.410(b)-7©(4), but the plan is

top heavy and an additional allocation had to be made to satisfy the top

heavy minimum. Would the potential varying allocation rates due to the top heavy minimum cause this plan

to violate the prototype rules for cross-tested formulas?

Thank you!

Laura R. Harrington

[J Simmons]

Hi, Laura,

I assume the 2%-of-pay for NHCE #2 is to be added to the 3%-of-pay SHNEC, to reach the 5%-of-pay gateway.

I think if you are using a prototype and thus subject to LRM 94 for cross-testing, you need to make sure that NHCE #2 receives the same %-of-pay as does NHCE #1 so that you only have one NHCE group.

[Tom Poje]

I'm not so sure that NHCE #2 has to receive the same rate as NHCE #1.

LRM simply says if you only have 2 NHCEs, then the max number of groups you can have is 1.

thus the plan meets that qualification.

LRM also specifies that the grouping must be reasonable (I'm pretty sure have only 1 group would be reasonable.)(I only point this part out simply because I imagine that some people will miss this point and simply assign people to groups in whatever order and then depend on Mr. Preston to back them up and say prove to me the grouping isn't reasonable)

now, while true each person in the group must receive the same amount/percentage, you have one person in the group who has failed the hours/last day provision - therefore, the person isn't eligibile for the group alloaction.( I can only assume this person must have had less than 500 hours.) the only reason this person received anything in the first place is not because of the grouping, but because of the safe harbor, and that is simply increased to the gateway minimum under a different portion of the document, not the allocation grouping.

if I recall, years ago at an ASPPA conference (on a different issue) someone asked about a prototype that had immediate eligibility if hired by such and such a date, and a 1 year wait for all new employees. I don't remember the exact details, but the plan appeared to fail 'coverage' (I'm not sure why the otherwise excludable wasn't use) However,the conclusion of the IRS went along the lines something like "well, its a prototype, and they always pass coverage and nondiscrim, so you must be ok"