New Comparability, NOT top heavy, No safe harbor

[Pension Panda]

We have a 401(k) plan with a profit sharing new comparability formula.  1000 hours & Last day requirement for the profit sharing contribution.  It is not top heavy.  There is no safe harbor nonelective or matching formula and it passes ADP just fine.  The new comparability formula puts eligible Individuals into their own classification category for profit sharing allocation purposes.  Owner wants the maximum so we gave all eligible employees with 1000+ hours & active on 12/31/16 a contribution of 1/3% of the owner to pass the gateway.  Alas, one of these profit sharing eligible employees terminated in January 2017 so they don't want to give him a profit sharing contribution for 2016.  It will still pass avg ben test & rate groups etc. if we give this otherwise eligible employee a "zero allocation" for the year.  The document appears to restrict PS contributions from those who worked less than 1000 hours and/or were not employed on 12/31 but not actually require a PS contribution to everyone otherwise eligible if one is made for the year.  Are we allowed to give this one employee a zero allocation for 2016 (for whatever reason) and give all other eligible EEs with 1000+ hours & active employment on 12/31 a PS contribution?  What do you think?

[Belgarath]

As you describe it, shouldn't be a problem. Since getting no allocation, former employee isn't "benefiting" and therefore doesn't have to receive gateway. One other question, since you specified that owner wants the maximum - is this maximum more than 9%? If so, then your gateway may be more than 1/3.

[BG5150]

Sure.  As long as you are passing coverage using the 70% ratio test.

PS:  What percentage is the owner getting?  If more than 15%, then you have to give just 5%, not necessarily 1/3 for the gateway.

(Side note:  if you are passing rate groups for the contributions, you do not need the ABT)

[BG5150]

2 minutes ago, Belgarath said:

As you describe it, shouldn't be a problem. Since getting no allocation, former employee isn't "benefiting" and therefore doesn't have to receive gateway. One other question, since you specified that owner wants the maximum - is this maximum more than 9%? If so, then your gateway will be more than 1/3.

If more than 15% it's more than 1/3 for gateway.

You are probably thinking of a SH plan, where everyone is getting 3%.  If owner gets more than 9% total, the staff will get more, up to 1/3 of the owner's % for gateway.  If owner is more than 15%, you stop at 5%.  Again, just for gateway.

[Belgarath]

Yeah, BG's comment on the 15% was what I was getting at, only he stated it better! When typing in a hurry, sometimes the thoughts don't translate to words on the page. So yes, what I was trying to say was it might be more than 3% - if HC gets more than 9%. And of course, could be up to 5% as BG says, if HC gets 15% or more. Sorry for any confusion.

[RatherBeGolfing]

5 minutes ago, BG5150 said:

Sure.  As long as you are passing coverage using the 70% ratio test.

PS:  What percentage is the owner getting?  If more than 15%, then you have to give just 5%, not necessarily 1/3 for the gateway.

(Side note:  if you are passing rate groups for the contributions, you do not need the ABT)

Agree with the above.  Exclusion of employees by name ($0 allocation) or other specific criteria having the same effect as an exclusion by name is not a reasonable classification for the ABT, so you would need to pass using ratio percentage test.

[Pension Panda]

Big Bucks the Owner is getting 13.21% to max out so 4.4% for the staff passed the gateway.  It felt kind of squirrelly so I wanted to ask my expert pension friends.  Definitely won't pass the reasonable classification test and it doesn't pass the rate group using the 70% ratio test so I'll tell them to give some to the participant and move on.  You guys are the best!

[CuseFan]

you don't need to pass rate group testing at 70% (RPT) - the reasonable classification is for coverage only. if coverage passes RPT by this one additional person not benefiting then your NDT can pass however you get it there - RPT or ABT. 

[Tom Poje]

the original proposed regs suggested earlier last year would have required reasonable classification for both coverage and nondiscrim, but, at least for the moment, the IRS backed off on that point.

[Mike Preston]

And just for fun, note that if you are really giving 4.4000000000000000% as a gateway you will fail gateway if it is based on 1/3 * ($35,000/$265,000) = 4.4025157%.  There are some that use rounding techniques that make it appear that it will pass, but for sake of an additional $1 or 2 why take that chance?

[Pension Panda]

A good point indeed. Our fancy pension software makes certain we remember to go out to at least 4 decimal places with our percentages but I was using shorthand for the purpose of this message board. 

This pension group is awesome!  Where else could you find 16 decimal places in a response? 

[BG5150]

1 hour ago, Mike Preston said:

And just for fun, note that if you are really giving 4.4000000000000000% as a gateway you will fail gateway if it is based on 1/3 * ($35,000/$265,000) = 4.4025157%.  There are some that use rounding techniques that make it appear that it will pass, but for sake of an additional $1 or 2 why take that chance?

I think Relius lets you get away with 4.402% or a 1.402 gateway after 3% SH.

[Mike Preston]

Unlikely to ever become an issue at 4.402%.  Won't round to an additional dollar unless comp exceed $96,955.59.