Terminated Participant to pass 401(a)(4)- Vesting?

[mefrancis1729]

I am designing a new 401(k) profit sharing plan. I have a terminated participant who is young and has low compensation. They enter the plan and then terminate in the middle of the year. I want to use this participant to pass 401(a)(4) as it would be the cheapest option. I end up having to give him about 90% of his compensation. If i design the plan so that there is no hour requirement or last day requirement for discretionary profit sharing, I believe I can give him this large amount. But how should I handle vesting? Does he need to be 100% vested as I am using him so heavily to pass testing? Could he be only 20% vested? Or could I even leave him at 0% vested? How would you handle the vesting if he needed to be 100% vested, but you didnt want any other employees to be automatically 100% vested?

[ETA Consulting LLC]

Technically, it's not an '11(g)' corrective amendment so the rules of "providing a meaningful benefit' are no relevant. So, they may be zero vested and such amount may ultimately be forfeited.

Just on the style observation, this entire scenario may equate to the 'tail wagging the dog' where you based an entire plan design on year one circumstances without any anticipation of future circumstances. I've, personally, done a little startup design work in the past in order to get a favorable year 1 while ensuring the ultimate design strategy was in place subsequent years. I just think it's worth mentioning the importance of knowing and incorporating the difference.

Good Luck!

[My 2 cents]

Seems to me that if you need to bring in a terminated employee to pass (and, even then, give them a contribution of 90% of pay!), perhaps you are cutting things a bit tighter than may be workable.

[Tom Poje]

first, remember, I am a Grinch, so such a plan design sounds like something I could dream about

you might want to check what the IRS said just a few months ago.
https://www.irs.gov/retirement-plans/discriminatory-plan-designs-using-short-service
this is just the last portion of the comments. Almost word for word the situation you are describing!

Plans may discriminate even though they allocate a larger percentage of compensation to NHCEs. With this design, NHCEs, on average, may seem to receive a misleadingly large accrual or allocation level. For example, an NHCE participant with $200 of annual compensation may receive a profit sharing allocation of $200 (a benefit equal to 100% of compensation), while an HCE with compensation of $200,000 may receive a benefit of only 25% of compensation or $50,000.

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1©(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

Page Last Reviewed or Updated: 01-Apr-2016

as the IRS says, yes, through the formulas and everything else giving a low paid NHCE 100% of comp 'works'

it violates a reasonable interpretation to prevent HCEs from favored treatment.

I think the killer is your opening statement

"I am designing a new..."