Is there a waiting period or not (for testing)?

[Guest user99]

Our TPA is saying that an employee is causing the plan to fail, but I don't agree with how the TPA is interpreting things. I think that the employee should not be included in any testing because EE was only employed for 3.5 months (and I think there is a 6 month waiting period). Unfortunately, TPA says that the plan sponsor needs to make an ER contribution to the terminated EE.

The relevant language and selections from the adoption agreement:

"Eligibility for all purposes of the plan (except as elected in … [sections below] for employer contributions)

- No age or service required"

However, just below there:

"However, different eligibility conditions will apply

- For purposes of all ER contributions (other than elective deferrals and matching contributions)

- For purposes of ER matching contributions"

The specified condition for those ER contributions is: "Completion of the following service requriement…

- 1/2 Year of Service

TPA says that the employee, even though only employed for 3.5 months, is "brought into" the test and counts for all testing because EE entered the plan with deferrals. FYI there is no match, only a 3% S/H nonelective contribution and an additional Profit Sharing contribution. There has never been a problem/failure before, and I've recently run into other mistakes with the TPA.

What do you think? Is it right that the employee is causing the plan to fail because there was no ER contribution made to the employee?

Thank you!

[PensionPro]

Few questions:

1. Is this employee entitled to the 3% safe harbor?

2. On what basis is the employer contribution being allocated?

3. What test specifically is failing?

[Guest user99]

Few questions:

1. Is this employee entitled to the 3% safe harbor?

2. On what basis is the employer contribution being allocated?

3. What test specifically is failing?

Hi,

Thanks for writing.

1. Our assumption was that no, the employee would not get the 3% because the 6 months were never satisfied.

2. The ER contribution consists of: 3% nonelective safe-harbor plus an additional profit share. The profit sharing is allocated as an additional: 5% to one "class" (basically everybody except the President of the organization) and 6% to the other class (which, again, is just one well paid person).

3. The plan is failing the Gateway test (Because the EE got 0% ER money...) as well as 401(a)(4) (I think for the same reason -- Gateway)

I need to step out but will be back later this evening or tomorrow if you need any other details.

[Tom Poje]

more importantly, is the plan top-heavy?

if so, any nonkey ee who could defer and is active on the last day must receive the top heavy, no matter if there is a greater eligbility for non elective contributions.

now, its also true that such an employee could be tested separately as an 'otherwise excludable', so I'm note sure why that would have a dramatic effect on testing.

[401king]

In our documents, the safe harbor eligibility provisions are separate from the deferral, match, PS elig. provisions. But, there are only two options - provide SH to each employee who is eligible to defer (standard for us); or, provide SH to employees who have completed 1 year of service and are over age 21 (which makes the plan subject to TH).

If we were your TPA, we would have setup the plan so that the SH eligibility meshes with deferral eligibility - at least that's our standard setup. The 6 month provisions would only apply to discretionary contributions.

With that said, as Tom Poje pointed out - testing the plan separately as otherwise excludable should get you through 401a4 at least WRT that employee.

[Guest user99]

more importantly, is the plan top-heavy?

if so, any nonkey ee who could defer and is active on the last day must receive the top heavy, no matter if there is a greater eligbility for non elective contributions.

The plan was not top heavy (and the EE was not employed on the last day of the plan year).

A light bulb may be starting to turn on here. Is it accurate to say:

1. Once an EE enters the plan (whether by making deferrals or by satisfying the waiting period for ER contributions) he is due any safe harbor, and it doesn't matter whether it's a matching or nonelective s/h contribution

2. That EE is also part of every compliance test performed on the plan that year

Unless... there's some way to make that EE "otherwise excludable"?

Thanks again

[Guest user99]

FYI I'm seeing that when the plan was restated they got rid of the thing about immediate deferrals, which is probably a good thing.

If "restatement" sounds like ancient history, I'm also not sure why we're just getting around to this now. The plan has a funny fiscal year, but it seems a bit late to deal with the 09 plan year. But I'm also not really the expert in these areas.

[Tom Poje]

it is important to keep in mind there are 2 basic tests - coverage and nondiscrimination

these are broken down into 3 components

401(k) - deferrals

401(m) - match and after tax

nonelective - profit sharing and forfeiture.

you could have different eligibility for each of these

e.g. immediate for deferral and 1 year for match and non elective

thus a plan could have immediate deferral, but the safe harbor, being a nonelective or match could have a 1 year wait [but it tosses out the get out of top-heavy free option]

so a person could show up on one of the compenents tests (e.g. 401(k), but not he other 2 if match/nonelective had 1 year wait, though for avg ben pct test anyone shows up who could have deferred)

in addition, if a plan has eligibility less than 1 year/age 21 you could further break up the testing into statutory includable and otherwise excludable.

that may be an oversimplified way of stating things and might not have covered every possibility, but about the best I can do

[Guest user99]

This is helpful, thanks again. Any other thoughts are of course welcome, but this helps me understand that the EE is most likely going to have to be included in the tests. I'm not sure if I'm smart enough to get all the intricacies anyway...