500 / 1000 hour rule

[rfahey]

I have a small profit sharing plan using a non standard document.

The owner is in the plan and 2 common law employees.

One of the employees terminated in 2011.

Is she entitled to an allocation if :

She worked under 500 hours ?

She worked 800 hours ?

She worked 1200 hours ?

Thanks,

Bob

[A Shot in the Dark]

You do not give enough information to answer your question. For example:

What are the eligibility provisions stated in the Plan Document?

What are the allocation provisions stated in the Plan Document?

[TPAMan]

This is a trick question. Not about accrual requirements, it's about who is benefiting in order to pass minimum coverage.

[John Feldt ERPA CPC QPA]

And, even if the document does not have failsafe provisions, then we still don't know answer without running an average benefits percentage test for coverage.

[Tom Poje]

then ignoring everything else, assuming the individual is in the plan.

and further it must be assumed such person would not receive anything otherwise the question makes no sense.

for coverage:

401k portion - includable and benefiting hours don't make a difference.

401m - excludable if worked less than 501 hours and terminated (assuming there is an hours requirement or last day provision.

include and not benefiting if worked over 500 hours. includable and benefiting if no hours no last day to receive a match even if didn't defer.

nonelctive - excludable if terminated and worked less than 501 hours. includable and not benefiting if worked over 500 hours.

if its a controlled group the terminated and 500 hours rule changes because by definition the person must be a 'participant'

if you are separately testing plan A from plan B, and person in B quit < 500 hours they are not excludable when looking at plan A because they are not a participant.

the term and < 500 hours rule is optional. you can alwasy count those bodies as long as you are consistent. this may be helpful if its an HCE that falls into that category.

avg ben pct test - include because they were benefiting under the 401k portion, but for the nondiscrim classification test can exclude if term < 500 and not benefitting for the nonelective portion

[QNPG]

then ignoring everything else, assuming the individual is in the plan.

and further it must be assumed such person would not receive anything otherwise the question makes no sense.

for coverage:

401k portion - includable and benefiting hours don't make a difference.

401m - excludable if worked less than 501 hours and terminated (assuming there is an hours requirement or last day provision.

include and not benefiting if worked over 500 hours. includable and benefiting if no hours no last day to receive a match even if didn't defer.

nonelctive - excludable if terminated and worked less than 501 hours. includable and not benefiting if worked over 500 hours.

if its a controlled group the terminated and 500 hours rule changes because by definition the person must be a 'participant'

if you are separately testing plan A from plan B, and person in B quit < 500 hours they are not excludable when looking at plan A because they are not a participant.

the term and < 500 hours rule is optional. you can alwasy count those bodies as long as you are consistent. this may be helpful if its an HCE that falls into that category.

avg ben pct test - include because they were benefiting under the 401k portion, but for the nondiscrim classification test can exclude if term < 500 and not benefitting for the nonelective portion

Go, Tom!

[rfahey]

The plan document says that you get a profit sharing allocation only if you were employed on the last day of the year and worked a year of service ( but it them goes on to say that this can me modified if certain coverage things are not met )

It is a profit sharing plan - not a 401K.

There are only 3 participants. THe doctor and two other common law.

ONe of the common laws terminated in 2011 with about 600 hours.

So I am not sure if she gets an allocation ( regular or top heavy ).

THank you.

[PensionPro]

The plan fails 410(b) ratio percentage test. The plan doc should provide guidance on whether to perform the average benefits test or allocate to the terminated participant. PS: terminees are not entitled to the TH minimum.

[Tom Poje]

so plan has 1 HCE and 2 NHCEs

last day rule, must work 1000 hours.

profit sharing only.

one NHCE worked 600 hours and terminated

since NHCE worked over 500 hours can't be excluded from testing.

since terminated not eligibile for contribution. the fact that they worked less than 1000 hours is somewhat irrelevant because they terminated. if they were still working they wouldn't be eligible for the contribution, but if they were active they would get the top heavy.

so for testing you have 1/2 NHCEs benefiting for a ratio % of 50%, fails testing

your comment "but it them goes on to say that this can me modified if certain coverage things are not met " implies the document has fail safe language.

if there is fail safe language then you never get to the avg ben test(that is impermissible), you simply bring the person in and provide a contribution. the person has magically met the requirements.

lets suppose the plan didn't have fail safe language. this is without checking numbers, so it could be I am incorrect on the following [in your case its a moot point since the plan appears to have fail safe language anyway]:

if the active NHCE was 5 years younger than the HCE, then 1.085^5 = 1.5 (the NHCEs benefit in tested on an accrual basis will produce an E-Bar 1.5 times that of the HCE.

so with 2 NHCEs that is an average of .75.

to pass avg ben PCT test you only need .70 so that would pass.

since 50% of the NHCEs benefit that is enough to pass any safe harbor % so arguably you would pass coverage without providing any additional contribution.

(Some IRS agent feel that excluding someone from a contribution who works > 500 is not a reasonable classification, and you would still fail, but that is a different matter)