What is permissable where each P is assigned to his own allocation group?

[Guest Dash02]

My client has maintained a cross-tested profit sharing plan for many years, Under the plan, each participant is assigned to his own allocation group. I selected this design feature figuring that it would provide the most flexibility. Despite using this design for many years, the plan has always made the same contribution percentage to everyone except the owner, who was provided a favored contribution. In recent years, everyone received a 3% allocation and the owner received 9%.

The sponsor is a distributor. The plan covers about 40 employees, almost one-half of whom are salesmen who make over $110K. The "Top Paid Group" election is in effect so as to limit the number of HCEs (employees making over $110K are not HCEs unless their comp is in the top 20%). The plan is not top heavy.

Early in 2011, 7 of the salesmen left the company to start a competing business. Two of them are HCEs and the other 5 are NHCEs (again, when the top paid group rules are applied).

I am currently in the process of running my testing calculations for the 2010 plan year and presenting different contribution scenarios to my client. Not surprisingly, the client would like NOT to have to make a contribution for 2010 to those who left.

To my way of thinking, the minimum gateway requirement will require that the same 3% contribution be given to the NHCEs who left in order for the owner to be able to receive 9%.

However, the plan document seems to permit the flexibility to provide zero allocations to the 2 HCEs who left. This would not violate the minimum gateway requirement and assuming that the cross-testing calculations pass, does this get me home free? By taking this course of action, are there other problems I need to be aware of?

Thanks in advance for your thoughts and guidance.

[Tom Poje]

the gateway is only provided to those employees who receive a nonelective contribution. thus if each person is in their own group and you provide no profit sharing to that group, then no gateway is required, even if that person is an NHCE. (Of course, if the plan was top heavy and the person was there on the last day they would get the top heavy and therefore any possible gateway)

my understanding is that for coverage purposes you can only use the ratio percenatge test, because the non discrim classification test can't be used because "an enumeration of employees by name or other criteria having the same effect as an enumeration by name is not considered a reasonable classification". while probably wouldn't matter in your case, if your group who received zippo consisted of only NHCEs, then even though you might pass nondiscrimination using cross testing, you still could fail coverage because you fail the 70% ratio % test.

[Guest Dash02]

Ah, yes, thank you Tom. I see in the Preamble to the Final Regs where an individual who doesn't benefit under the plan for the plan year is not an "employee", and hense not a "NHCE," and is not required to receive a minimum gateway allocation. Consequently, we can allocate zero to the 5 NHCEs (and 2 HCEs) who left the company and still avail ourselves of cross-testing for discrimination.

With respect to coverage, yes, I agree, we would have to pass the 70% test and would not be able to resort to the reasonable classification test. However, we would pass the 70% test if the 5 NHCEs that left the company are given zero, and indeed the coverage percentage is over 100% if zero allocations are also given to the 2 HCEs that left the company along with the 5 NHCEs.

So, it seems as though I can make my client very happy without losing any sleep in fear that I've done something that could disqualify the plan.

Anyone else have any cautionary thoughts? Thanks in advance.

[AndyH]

Tom, where is that quote from? And the outfit too?

[Tom Poje]

Andy - what outfit? You mean you don't dress like this?

have you seen any pilgrim ladies about? I can't seem to find any.

[AndyH]

Andy - what outfit? You mean you don't dress like this?

have you seen any pilgrim ladies about? I can't seem to find any.

They're hanging? in Salem MA this time of year. Plenty to choose from.

[Tom Poje]

dang it. always in the wrong place.

oh well, that just means more pumpkin cookies for myself.

[Kevin C]

Tom's quote looks like it is from:

1.410(b)-4(b)Reasonable classification established by the employer.—

A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification.