Gateway Minimum

[Rob P]

A client sponsors a new-comp discretionary profit sharing plan. Each employee is his/her own allocation group. On a payroll by payroll period, the client would make a contribution to the plan of 5% to each eligible participant (both HCE and NHCE), except the owner who would receive slightly more. In early spring 2009, the client fell on hard times and elected to stop making all contributions to the plan for 2009.

I just received their 2009 census and was reviewing some of the nondiscrimination issues. Comparing the annual compensation to the actual employer contribution, one of the HCE’s received exactly 5% of their compensation because they terminated before the client stopped contributing. None of the active NHCEs received an annual allocation greater than 1.29%.

Does this mean they’ve failed the gateway test? It is my understanding that the 1/3 test is based on compensation as an eligible participant. Is there anyway to justify that compensation is only through the date the client stopped making deposits? At that point they easily would not have violated any nondiscrimination rules.

Note the plan was never frozen. The client elected to simply stop making the discretionary contributions.

Any thoughts are appreciated.

[rcline46]

Interesting - it is obvious the plan does NOT have an hours requirement, nor an end of year requirement to receive an allocation, otherwise you have a failure to follow the document issue.

So, an additional allocation is necessary to satisfy gateway because it does not appear that you can satisfy any other tests based on the information given (allocation basis with permitted disparity, broadly available rates, etc.)

[Rob P]

Thanks for the response.

Correct, no hours or EOY requirement for the allocation.

Your answer was not unexpected, I was just hoping that there may be an exception out there that I may not of heard about.

Any thoughts on making a "refund" or "forfeit" of the employer contribution to lower the HCE percentage?

[Mike Preston]

I suppose this is a plan where each participant has their own investment account and the deposits you mentioned were made directly into those accounts. That is, there is *not* a pooled investment account, right?

If so, about the only thing that might be doable is to redirect some of the HCE contributions to NHCE's.

My guess is that the IRS may not like this approach, so you would want to confirm with ERISA counsel before going down this path.

One thing to layer on top of this is that an employer/plan sponsor, when dealing with a plan where everybody is in individual allocation groups is, according to the IRS, supposed to make a contemporaneous writing with every contribution saying who it belongs to. Was that done?

[Guest ericdeko]

I suppose this is a plan where each participant has their own investment account and the deposits you mentioned were made directly into those accounts. That is, there is *not* a pooled investment account, right?

If so, about the only thing that might be doable is to redirect some of the HCE contributions to NHCE's.

My guess is that the IRS may not like this approach, so you would want to confirm with ERISA counsel before going down this path.

One thing to layer on top of this is that an employer/plan sponsor, when dealing with a plan where everybody is in individual allocation groups is, according to the IRS, supposed to make a contemporaneous writing with every contribution saying who it belongs to. Was that done?

Your quote is very interesting and point blank. I also wonder what IRS may think.

[AndyH]

Is the plan top heavy?