Cross Testing and the Gateway

[buckaroo]

I have been doing some reading and some thinking about cross testing and the gateway requirement. (I know, very dangerous.) My understanding is that in order to pass 401(a)(4) when cross testing, the plan must satisfy the gateway requirement. When a plan allocates a profit sharing allocation to group of NHCEs that does not satisfy the gateway requirement, then their allocation must be increased to satisfy the gateway. (i.e. NHCE participants get a 3% TH min cont and the gateway is 5%. The cont is increased to those who only got the 3%.) I know that the allocation needs to be increased, but here is where I need additional confirmation. It appears that in order to do this increase, the plan may require an amendment to allocate the additional amount. Is this correct? Can a document be written such that it states that the increased allocation is required to select participants? Even if this violates the terms of the plan which may allocate the contribution comp-to-comp inside the allocation group? Does anyone inform their client of this and require them to execute an amendment?

[Tom Poje]

most (if not all) documents will have the option to add the gateway language to the plan.

in fact, in LRM 94 there is a note to the reviewer. (While LRM 94 pertains to prototypes, I do not see why the note itself would not apply to all plans...that is, that a document can't simply say it will satisfy one of the gateways, but it must be specific as to which gateway it will satisfy, if such language is to be included. maybe my opinion only,but what the heck)

we put the 5% minimum allocation gateway language in all our plans that would allocate by class.

If I understand the rules correctly, since this is a 'descretionary amendment- [not required] it has to be in place before plan year end. otherwise you correct by a corrective amendment via -11g.

(Note to reviewer: There are other gateways that may be used in order for a

defined contribution plan to cross-test using equivalent benefits under

1.401(a)(4)-8(b). The plan may provide for a different gateway other than the

minimum allocation gateway (for instance, the broadly available allocation rate

requirement of Regulations section 1.401(a)(4)-8(b)(1)(iii) or the gradual age or

service based allocation rate requirement of section 1.401(a)(4)-8(b)(1)(iv));

however, sample language for other gateways is not provided herein. If a

sponsor wishes to use other gateways, it is important to ensure that the benefits

provided under the plan remain definitely determinable. In order for plan benefits

to remain definitely determinable, the plan document should specify which

gateway is used. The plan document could allow adopting employers to elect

between different gateways, but in order to provide definitely determinable

benefits it is not sufficient for the plan document merely to specify that one of the

gateway requirements will be satisfied.)

[BG5150]

Just a quick side note on the 3% vs 5% thing: You may not have to give an additional contribution to some. Top Heavy contributions are based on full-year compensation, whereas Profit Sharing can be based on partial year compensation.

Sometimes the 3% of full year comp comes out to more than 5% of participation comp. You would allocate the greater amount.