Failing Gateway test

[Chippy]

I have a cross tested plan with 5 groups. The profit sharing contribution is allocated on 414s comp, which is compensation paid for hours worked. It does not included bonus, overtime, vacation or sick pay. The gateway test has to pass the 5% test and I am using 415 compensation. One of the groups receives 5% of their 414s compensation. This group is failing gateway.

To correct the test, can I give each employee the addtional amount needed to get them to 5% of 415 comp? Which would mean each employee would receive a different percentage, it would not be pro-rata?

and in this group there are highly compensated employees. Since they are HCEs, do they have to receive an additional amount to get to 5% of 415 comp? I'm thinking no, since they are hces. But since they are part of a group, I wasn't sure if I had to treat everyone in the group the same.

thanks for your help.

[John Feldt ERPA CPC QPA]

Q. "To correct the test, can I give each employee the addtional amount needed to get them to 5% of 415 comp? Which would mean each employee would receive a different percentage, it would not be pro-rata?"

A. The plan document spells out how amounts are allocated. If the plan document states that each person is a separate rate group, then yes, the employer can allocate disparate amounts to each person in that division. If the plan document indicates that employees in division A are allocated an amount that is prorated by compensation, then you will need to bump up eveyone until the lowest allocation rate for that group is 5% of 415 compensation.

Q "and in this group there are highly compensated employees. Since they are HCEs, do they have to receive an additional amount to get to 5% of 415 comp?"

A. Same answer as above - if division A has some HCEs, the document will spell out how they are affected.

[PensionPro]

1) Closely read the plan document especially with regard to the gateway minimum. If you can give the additional contribution just to the NHCEs who are causing the failure and not violate the terms of the plan document, feel free to do so. Otherwise ...

2) You have the option of amending the plan for the year according to 1.401(a)(4)-11(g) and providing the additional contribution to those NHCEs.

All of this is assuming the question relates to a 2009 calendar year plan.

[AndyH]

2) You have the option of amending the plan for the year according to 1.401(a)(4)-11(g) and providing the additional contribution to those NHCEs.

This may be the way to go - a corrective amendment could make the allocations all equal to 5% of 415 pay regardless of what the normal allocation provisions are.

[BG5150]

So, for my own edification:

the "1/3" gateway test can be satisfied with 414, but the SH "5%" gateway must be tested on 415?

[John Feldt ERPA CPC QPA]

Look at 1.401(a)(4)-8(b)(1)(vi)(A) and (B) - note the difference where in (B), the 5% allocation, it refers to 415 compensation.

[Laura Harrington]

Q. "To correct the test, can I give each employee the addtional amount needed to get them to 5% of 415 comp? Which would mean each employee would receive a different percentage, it would not be pro-rata?"

A. The plan document spells out how amounts are allocated. If the plan document states that each person is a separate rate group, then yes, the employer can allocate disparate amounts to each person in that division. If the plan document indicates that employees in division A are allocated an amount that is prorated by compensation, then you will need to bump up eveyone until the lowest allocation rate for that group is 5% of 415 compensation.

Q "and in this group there are highly compensated employees. Since they are HCEs, do they have to receive an additional amount to get to 5% of 415 comp?"

A. Same answer as above - if division A has some HCEs, the document will spell out how they are affected.

I agree...you need to read the plan document carefully. The plan document we use for plans that are intended to be cross-tested have language that specifically allows for an additional contribution to any NHCE just to satisfy the gateway minimum. This language over-rides any other provisions regarding the allocation in the plan document (e.g. compensation definition used to calculate contribution, accrual requirements, etc.).

[Tom Poje]

If it helps, the gateway language (assuming its properly worded) is intended to work in a somewhat similar way as top heavy language works