Plan Year compensation for Gateway

[LarryDavid]

Quick question that I think (hope?) I know the answer to but just want to confirm: I'm aggregating a Partner DB/DC plan arrangement with a Staff DC-only plan. In the Staff DC plan all participants receive an allocation of 7.5% of pay. This provision was put in to specifically avoid any minimum gateway issues. However, the plan's eligibility is 1st of the month after 1 year of service. Therefore, an employee hired 6/30/2011 would not enter the plan until 7/1/2012, and his allocation would be based on 7.5% of pay earned after DOP (i.e., roughly 3.75% of total year pay).

I believe this allocation is okay and would still satisfy the minimum gateway requirements, based on comments I've read in the Coverage and Nondiscrimination Answer Book, specifically the following paragraph:

"The definition of compensation set forth in Code Section 415©(3) is to be used for purposes of determining applicable limits on benefit accruals (the 100 percent of average compensation/$160,000 (as indexed) limit) and allocations (the 100 percent of compensation/$40,000 (as indexed) limit). It is important to note, however, that the definition is also used for certain other purposes, including determining key employees, determining top-heavy benefits or allocations, establishing which employees are to be considered HCEs, and the minimum gateway allocation (through date of participation only)."

However, I do not see anything in the Code or the Regs that state this. Can someone please confirm if the Staff plan in my example is okay with regards to the minimum allocation gateway?

[ETA Consulting LLC]

Remember, there are two types of Gateway: 1) When you compare rates of allocation to different employees (e.g. 1/3rd the rate) and 2) when you provide a flat percentage (e.g. 5%).

I believe the 7.5% is a comparative rate where this is the maximum level needed for any amounts allocated to HCEs. The emphasis in on the fact that it is a comparision rather than a fixed rate; in which case you'd use the definition of Compensation used for allocation purposes.

You would need to verify this, but this is just my memory of how it works.

Good Luck!

[Tom Poje]

The preamble to the final nondiscrim regs is probably easier to understand than the regs. The whole thing can be found here:

http://benefitslink.com/src/taxregs/1.401a4-8-final.html

I included the applicable portion below:

One commentator suggested that the regulatory provision that permits a plan to satisfy the gateway requirement by providing an allocation of at least 5% of compensation within the meaning of section 415©(3) not require that the allocation be based on a full year's compensation in the case of an employee who participates in the plan for only a portion of the plan year. The final regulations modify this requirement as suggested. The final regulations allow a plan to satisfy the gateway by providing an allocation of at least 5% of compensation within the meaning of section 415©(3), limited to a period otherwise permissible under the timing rules applicable under the definition of plan year compensation, in the same manner as the general rules under the section 401(a)(4) regulations. The definition of plan year compensation permits use of amounts paid only during the period of participation within the plan year.

............

I personally know one of the authors of the Coverage and Nondiscrimination Answer Book. Out of his mind. Plain and simple. He is a nut case. But even a blind pig can find an acorn once and awhile. (Every time I look in the mirror and see myself I am even more convinced of that. ) So I think you can trust the book in this case.

[LarryDavid]

Thanks Tom! I figured I could count on you