Discrim testing for 401(k) w/profit share

[Dzog]

Just received note from our TPA that our profit share test did not pass. We started 2015 with owner and 5 employees. During the year we terminated one, one took early retirement, and one left for another job. None of the 3 were employed on the last day or received 1000 hour requirement so they are not eligible for profit share. (We have a tiered structure for profit share.) The TPA says that we have 3 employees who are otherwise eligible for the "plan", so they come onto the discrimination test as $0. This is what made the test fail. Is this correct? I can't see how the 3 terminated employees can be used in testing profit share if they are not eligible for profit share. Thank you in advance for your response.

[401king]

The TPA is correct.

There are Allocation Conditions (i.e. Last Day + 1000 hours during the year - an annual requirement) and Eligibility Requirements (21 + 1 year of service - a one-time requirement); they are mutually exclusive. You can be Eligible for a PS contribution, but not meet the Allocation Requirement - In this instance you do not receive a PS contribution, although you are included in the PS test.

[Tom Poje]

for better or worse, the regulations require you to include in testing anyone who met eligibility to enter the plan, terminated and worked more than 500 hours. so of the 5 employees, despite quitting the 3 must have worked over 500 hours, so you only 2 of 5 benefiting or 40%.

to keep it simple, the regulations generally require 70% for coverage (without getting into other possibilities)

so without knowing more details it sounds like your TPA is providing correct information. e.g. it is possible early retirees are eligible for a contribution depending on document language and sometimes that is missed.

all the credit in the world to you for following up and asking.