Profit Sharing for owner who is the only eligible participant

[Alex Daisy]

I am working on a very small plan where there is a last day requirement in order to be eligible to receive a Profit Sharing Contribution.

The owner of the company was the only eligible employee at the end of 2008, and wants to allocate the entire $10,000 profit sharing contribution to herself.

Will I run into any coverage issues? What type of testing is required on the Profit Sharing Contribution.

Thanks in Advance for the assistance.

[Guest Sieve]

410(b) minimum coverage testing. A last day requirement means that those not there on the last day are treated as not benefiting under the plan, and must be included in the coverage test. With a small employer, it can easily mean that the ratio percentage tests--and other alternative coverage tests--fail.

If, in your case, there were any NHCEs who met age/service and were employed on their plan entry date, but did not receive an allocation due to termination prior to the last day of the year, and if there were no HCEs in that same category, then you'll have failed the coverage test if the owner is the only one to receive an allocation for the year.

[BG5150]

In other words:

Were there any NCHE's who entered the plan during 2008, but terminated before year end? (Or HCE's for that matter)

[Mike Preston]

Larry's post is correct, if you superimpose the requirement that only "nonexcludable" employees would be included in the test. For example, if somebody terminated with less than 500 hours that person would be excludable and not included in the test.

[Guest Sieve]

You're absolutely correct, Mike. Thanks for picking up on that . . .

[BG5150]

Larry's post is correct, if you superimpose the requirement that only "nonexcludable" employees would be included in the test. For example, if somebody terminated with less than 500 hours that person would be excludable and not included in the test.

Or under 21. Or those with less than 1 yr of service.

[Guest Sieve]

BG - Age & service mentioned (but not detailed) in post #2.

[Alex Daisy]

In other words:

Were there any NCHE's who entered the plan during 2008, but terminated before year end? (Or HCE's for that matter)

Yes, there was one HNCE who was already in the Plan for 2008, and worked over 500 hours, and terminated before the end of the year and did not get a Profit Sharing Contributution. The P/S allocation was done via New Comparability.

Am I correct to say that this person should get a P/S contribution in order to Pass the 410(b) minimum coverage test?

[Bill Presson]

In other words:

Were there any NCHE's who entered the plan during 2008, but terminated before year end? (Or HCE's for that matter)

Yes, there was one HNCE who was already in the Plan for 2008, and worked over 500 hours, and terminated before the end of the year and did not get a Profit Sharing Contributution. The P/S allocation was done via New Comparability.

Am I correct to say that this person should get a P/S contribution in order to Pass the 410(b) minimum coverage test?

You are correct.

[Mike Preston]

The P/S allocation was done via New Comparability.

What do you mean by this? If there was only one participant receiving an allocation, how is it "New Comparability"?

[Alex Daisy]

The P/S allocation was done via New Comparability.

What do you mean by this? If there was only one participant receiving an allocation, how is it "New Comparability"?

The Plan Document calls for a New Comparability allocation, but since only the owner was employed at the end of 2008, they were the only participant who received a P/S Contribution.

However, I now know that I have to include the other employee who was a plan participant during 2008 but was terminated during the year with more than 500 hours, in order to pass the 410 (b) Coverage test.

[Tom Poje]

if your plan document has fail-safe language then you can provide the contribution.

If not, you will have to do so via corrective amendment

[Guest Sieve]

See Treas. Reg. Section 401(a)(4)-11(g) if a corrective amendment is necessary.