Does this stink?

[austin3515]

Plan is New Comp, using X-testing to get owners to max. PS includes last day rule; plan is also SHNEC.

Plan is having trouble passing testing. There is a terminated employee with low wages. He's getting the SHNEC and therefore the Gateway Minimum. Plan says each employee is in their own group (subject to reasonable classification). This person is the only Janitor in the entire company, so reasonable classification is not an issue.

How do you all feel about an 11(g) amendment to eliminate the last day rule, allowing me to drive the janitor all the way up to 16% of pay, while leaving everyone else at the gateway minimum of 5%?

Something is rubbing me the wrong way about it; I just can't find the rules that say I can't do it.

[Bird]

Nothing wrong with it IMO. Yeah it smells a little.

FWIW we usually don't use a last day provision if we have each person in their own group. You can do whatever you want for each "group" anyway so there's no need for further restrictions based on hours or employment status.

[austin3515]

You just blew my mind...

Same with an hours requirement??

I know, we use a prototype (switching to VS for PPA), so we;'re stuck with the reasonable classification restrictions. Do you think that presnets a problem, or is it a reasonable classification to say people who are termed get one rate and people with less than 1000 hours get another, etc?

[Bird]

Right, no hours no last day. I think I remember hearing somewhere that employment status is ok, or maybe it was just someone's opinion...

I found this:

Reasonable classifications generally include specified job categories, nature

of salary (hourly vs. salaried), geographical location or similar bona fide

business criteria. An enumeration of employees by name or other specific

criteria having the same effect as an enumeration by name is not considered a

reasonable classification.

in an IRS handbook of some sort that I found online (here). It doesn't cite status.

[DMcGovern]

I seem to recall a post from Reish & Reicher that said the IRS has gone both ways on whether terminated participants is a reasonable classification.

The first fact in the factual determination is the underlying business reason for the classification - if it benefits the employer (i.e. reduces their cost or allowing an increase to the HCEs), it would not meet this fact. It sounds like in this case, giving one particular employee - terminated and with low wages - would be determined to be benefiting the employer. I remember reading something about singling out people with low income to help pass the test would not fly under audit.

[Trekker]

I thought the 11(g) amendment could only be used if the plan would not be qualified without it and not simply for convenience of passing the test while keeping the HCEs at their desired level. We had a similar situation and the HCEs had to accept a lower amount for that particular year so the tests would pass.

I may be wrong and off of your issue but I wanted to put this out there.

[austin3515]

Bird, I believe that is straight from the regs.

REgarding Trekker's point, there was a recent IRS Q&A where they said you could use an 11(g) amendment as opposed to increasing contributions to the active employees. It was an ASPPA Q&A.