Allocating/testing on Partial Compensation

[abanky]

New Comparability Plan:

Comp from date of participation.

Employee enters on 7/1/2015, and comp is exactly half of his full year. let's say full year is 20,000, partial is 10,000.

Can the participant receive an allocation of 20k and therefore have an allocation % of 200%?

[Tom Poje]

comp for 415 purposes is based on full year comp, allocation comp can be something else.

only in a short plan year is 415 comp reduced from the max (e.g 260,000 in 2014, but even then, entering during the year has no effect on the 415 limit)

[abanky]

so i can give 20k and have a 401a4 allocation rate of 200%

[My 2 cents]

so i can give 20k and have a 401a4 allocation rate of 200%

Do you perform 401(a)(4) test based on 415 comp or comp while a participant?

[Tom Poje]

the 410(a)(4) rules clearly permit you to use comp while a participant. 1.401(A)(4)-12 definition: plan year compensation.

so for instance the person enters mid year, but the regs require you to use full year for top heavy so sometimes you get help in testing. As I recall, this was even asked at different ASPPA Conferences and the IRS indicated that was ok. I would note that the last sentence in the definition indicates you need to run things on a consistent basis from year to year, and in a manner that does not discriminate in favor of the HCEs. I think there are certain 'cheating' situations not permitted. e.g. people enter 'last day of plan year', so I have one day's worth of comp but provide an allocation based on full year comp, but using comp from DOP blows things out of the water.

.

let's change the question slightly.

ee's spouse makes mega $ working elsewhere (unrelated company), so their comp isn't 'essential'

they are an NHCE, enter 7/1, make $5000 and defer it all (ignoring taxes, etc)

there is a 100% QMAC, so they get $5000 in QMAC.

would you have a problem using 200% for the ADP %?

[abanky]

I see your point about abuse. Consistency is best in all cases, imho.

I would see no problem with 200%, should I.

[Tom Poje]

should be possible, unless there is something else going on.

for example, in a DC plan deductibility is 25% of total eligible comp, so if you are being as generous with other folks, you couldn't do this and deduct it.

if it was a db/dc combo plan and you were limited to 6% deductibility in the DC it obviously wouldn't work.

[Mike Preston]

if it was a db/dc combo plan and you were limited to 6% deductibility in the DC it obviously wouldn't work.

Huh?

[Tom Poje]

huh yourself.

if you give someone 100% of pay how do you deduct it if you are limited to 6% in total (unless you have enough other comp that are not anywhere close to 6%.

[Kevin C]

let's change the question slightly.

ee's spouse makes mega $ working elsewhere (unrelated company), so their comp isn't 'essential'

they are an NHCE, enter 7/1, make $5000 and defer it all (ignoring taxes, etc)

there is a 100% QMAC, so they get $5000 in QMAC.

would you have a problem using 200% for the ADP %?

Unless at least half of the NHCEs are receiving a 50% of pay QNEC, you won't be able to use all of a 100% of pay QNEC in the ADP test. The disproportionate QNEC rules for ADP testing are in 1.401(k)-2(a)(6)(iv) and ACP testing in 1.401(m)-2(a)(6)(v).

[Mike Preston]

Besides the problem that Kevin pointed out, all I wanted was the clarification you provided. In *your* numeric example the person of interest is making 5k. 94% of 5k is $4,700. Assume a typical gateway of 5%. The $4,700 would need $470,000 of additional comp so that the aggregate would fall below 6%. Potentially much, much less if there is another HCE getting something less than 5%.

[Tom Poje]

I'm still baffled. the original post asked if the person making 20,000 (10,000 from mid year comp) could receive an allocation of 20,000. I still would hold such a person would use up the 6% deductibility awful fast.

so I have 2 people, one at 260,000 and the other at 20,000,

6% of 280,000 = is 16,800. yet I have already given 20,000 to the NHCE.

The example I used was only referring back to the question is there a problem of having 200% of comp in new comp testing, so I posed the example suggesting you probably wouldn't have a problem using 200% in the ADP or ACP test, so why should it be a problem in the new comp plan.

[Mike Preston]

so I have 3 people. Husband and wife making $260,000 and NHCE making $20,000. Wife gets allocation of $1. NHCE gets allocation of $20,000. How much can husband get? Isn't it $12,399? Your statement was "if it was a db/dc combo plan and you were limited to 6% deductibility in the DC it obviously wouldn't work". Had you said "it was a db/dc combo plan with two participants in the DC it obviously wouldn't work" I wouldn't have "huh"ed you.