CB/DC Combo - Differing PS % in allocation groups

[401(k)athryn]

A plan sponsor has a Cash Balance Plan and 401(k) PS plan with a 3% safe harbor allocation.  The PS plan has a cross-tested allocation with 7 different allocation groups.  The plan was not designed to have one group per participant because the plan sponsor is a Partnership and the IRS has stated that this may not be appropriate (separate discussion). 

The two owners and two employees are included in the CB plan.  4 additional NHCE employees are excluded from the CB plan, but are included in the 401(k) PS Plan.  The special gateway is 7.5%.  For the 4 employees NOT in the CB plan, they receive the 3% safe harbor plus 4.5% profit sharing to meet this gateway.  The 2 employees in the CB plan only need 2.7% in PS to pass testing.

This leaves employees in the same PS allocation group receiving different PS percentages (4.5% vs. 2.7%).  I would not have thought that this was okay because the 401(k) plan document states that all employees in the same group should receive a pro-rata allocation with the group (i.e. same %).  Are there special rules that allow us to give differing % in the same PS group if it is merely bumping up the allocation for some employees to meet the minimum gateway?

If we are allowed to give different percentages, does it require an 11(g) amendment?  Our actuary says no, but I am not 100% convinced.

 

[K2]

I'd start by saying you should of course check the document section on the gateway.  Does the document itself allow you to raise a participant to a level needed to satisfy the gateway.  If yes, you're done.  If not, then I would think an -11g would be in order.

[Lou S.]

Read the plan document. Many have "fail safe" language that will "top up" a required gate way contribution to pass the required test, even if it results in differing allocation rates for employees in the same group.

[401(k)athryn]

Thank you both!  I think 11(g) is the way to go here.  The fail safe language in our document allows us to waive allocation requirements for profit sharing to someone receiving a safe harbor, top heavy or QNEC, but does not indicate that we can increase allocations to only one or some of the employees in a group to meet gateway.  Thanks again!

[BG5150]

As I see it, you are stopping at the gateway for the 2 participants in the CB plan.

Are these 2.7% people otherwise eligible to receive a PS?  If so, I would say they must get the same % as those in the same allocation group. There is nothing that says they do not get it, unless they fail any of the conditions to receive a PS in the first place.  Just because the gateway passes doesn't mean you stop allocating the PS per the document.

 

You don't need an 11-g amendment, because you are not trying to give anyone something they didn't originally "deserve."

[401(k)athryn]

One of the employees receiving 2.7% is active and eligible for a PS allocation.  The other is terminated, but the last day requirement is waived so that she can receive the 2.7% required to meet gateway.  The 11(g) amendment would be for the four employees receiving the 4.5% in PS.  In other words, everyone in the "group" receives 2.7%, but then the four employees are bumped up to 4.5% to meet gateway. 

BG5150 - Is your opinion that this should NOT be done at all and that the employees who have been allocated only the 2.7% in PS should be receiving the full 4.5% so that everyone in the group receives the same PS? 

[BG5150]

I think I may have had my fact pattern wrong. 

So we have this:  plan will pass with only the g/w given as PS. 

But, we have an allocation group that has people with different gateway minimums.  Of those, 2 have a g/w of 2.7% (with one of those two otherwise not elgiible for PS due to last day rule) and everyone else has 4.5%. 

I think that the one 2.7%er needs to get an additional 1.8% to be up with the rest of the group.  That's what the allocation conditions require.  The terminated 2.7%er stays there, because there is nothing in the plan giving her anything more--she is not eligible for PS this year.

 

[401(k)athryn]

After some more thought - I completely agree with you BG5150!  The actuary does NOT agree, but certainly would allocate a higher amount to an NHCE (the active one!) if we ask him to do so. Thank you!