Terminated Employee in DC plan - 410(b)

[cohendrake]

Fairly common situation in small DC plans that I have not seen definitively addressed:

Two participants for 2015 Profit Sharing Plan:

Key Employee - salary $100,000

Non-Key - salary $20,000 and terminated employment in 2015 after getting 500 hours

Plan has a last day requirement on both the PS and TH contributions.

If the idea is to maximize the contribution for 2015 will it be:

A) $25,000 being 25% of the $100,000 salary for the Key Employee who would get it all

B) $30,000 being 25% of both salaries

If your answer is (B) then how much of that $30,000 would the Non-Key employee have to get?

[Lou S.]

Is the Key an HCE?

Does the Plan have fail safe language for 410(b)?

Is the Plan's allocation formula cross tested, pro-rata or integrated?

What dos the plan document say?

[ETA Consulting LLC]

I "THINK" is understand what the question is, but is worded incorrectly. The answer to your question, as worded, is simply $25,000; but it's obvious that you will fail 410(b). The deductibility limit is 25% of aggregate compensation for those who are "eligible to benefit" during the year. Since the non-key employee terminated and was, therefore, not eligible to benefit during the year, then his salary would not be considered for the deductibility limit calculation (unless the plan has a 401(k) provision which would now put him back into the eligible group).

What "I THINK YOU WANTED TO KNOW" is what would happen should the non-key employee who actually met initial eligibility under the plan but failed to work the 1000 hours necessary in order to receive an allocation during the year (but was employed on the last day). In instance, he would NOT be in the eligible group... That is UNTIL he actually entered due to the TH minimum requirement. In this case, even though he was otherwise not entitled to a contribution (and therefore excluded from the group), he would now be in the group because he is now eligible because of the need for a TH minimum.

This still ignores the fact that you're still failing 410(b). When you incorporate the need to pass 410(b) into your equation, then you'll probably see why the question never came up. Generally, when you're working with an allocation group that passes 410(b), you won't have any deductibility issues.

Good Luck!

[Bill Presson]

ETA: The non-key employee terminated employment and wasn't employed on the last day.

So it would appear that either the non-key is brought back in because the plan has fail safe language or the plan will need an -11g amendment.

[ETA Consulting LLC]

I agree, 100%. There is a 410(b) issue. That issue actually jumps out on the first read. I was trying to determine whether or not there was another "hypothetical" issue that would question deductibility.

The title of the original post mentioned 410(b), but the question when on to ask about making the maximum deductible contribution. The deductibility limit is going to increase from $25,000 to $30,000 when you implement the fail safe - or 11(g) amendment to bring the other participant into the 'benefiting' group.

I was trying to address the deductiblity while admittedly ignoring the obvious 410(b) issue; which was more of a theoretical answer than a pragmatic approach to the issue. But, I agree with you 100%.

Good Luck!