Covering Summer Help

[Guest SPollock]

I am working with a client who has a Standardized Profit Sharing Plan. He has approx. 25 employees but 18 of them work only during the summer months. 16 of the 18 consistantly work over 1000 hours but are not employed on the last day of the year. We are looking to convert the plan to a Nonstandardized Profit Sharing / 401(k) Plan with a last day of the year eligibility requirement. The Plan is Top Heavy. If we make a profit sharing contribution, will we be required to make a top heavy contribution to the 16 summer help employees (who work over 1000 hours) who are not employed on the last day of the year? If we make a matching contribution to the 401(k) plan, must we match the summer help employees? If it is important, most of the summer help are hired back each year. Thank you!

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[This message has been edited by SPollock (edited 08-14-1999).]

[Ervin Barham]

You don't mention what the eligibility requirement is for the plan. Is it one year?

If the employees are eligible (check carefully!), then if they are not employed on the last day, you are not required to make a top heavy minimum for them.

You are, however, required to pass coverage using the 70% test (ratio %) or some variation of the average benefits test if you are not in a standardized plan. This applies to matching and profit sharing contributions.

The ratio percentage test requires that if you make a contribution, then the plan must benefit(receive a contribution)a percentage that is at least 70% of the percentage of includible highly compensated employees benefitting under the plan. Generally these rules are found in Section 410(B) and the applicable regs. Not knowing all of the facts about how many other employees are eligible makes it impossible to answer this question exactly.

If you fail the coverage test by having to include the summer help if you go to a non-standard plan, then the plan will generally have some sort of provision to insure that the plan will pass coverage. Check the details of the plan document to find that provision.

In a standard plan, as you know, all employees will have to be covered that meet the eligibility requirements and have more than 501 hours in the year of termination.

You should go through the coverage testing before converting to the non-standard plan to determine how many will actually have to be covered and the cost involved.

I hope this helps.

[This message has been edited by Ervin Barham (edited 08-16-1999).]