Compensation for New Entrants in Initial Short Plan Year

[JJ]

I am working on a plan with the following situations:

A new 401(k) in place effective 5/1/16 with

1. 3 months eligibility for EE deferrals
2. 6 months eligibility for employer match
3. ER matching 100% up to 6% of compensation
4. 415 Limit Compensation definition that includes EE deferrals
5. true up contributions after year end

A hypothetical employee -

• Date of Hire = 1/1/2016
• Monthly compensation in 2016= $10,000
• 2016 annual compensation = $120,000
• Made10% deferral contributions only for 2 months (10/2016 & 11/2016)

At the end of 2016 plan year, the total deferrals = $10,000 x 2 x 10% = $2,000

 

Questions:

1. What is the compensation amount that should be used to calculate the deferral rate for purposes of ADP testing and true up contribution?  Is it $120,000 (annual gross comp.) or $80,000 (comp. since plan effective date 5/1/16) or $20,000 (comp. for the months in which the participant made deferral contributions)?
2. What is the compensation amount that should be used to run the true up calculation and ACP testing?  $120,000, $80,000, $60,000 or $20,000?
3. The plan has a class exclusion and fails the Ratio Percentage Test for 2016.  What is the compensation amount that should be used to run the next step - Average Benefits Test?

Thank you!

[Mr Bagwell]

JJ,

I'll point you in the right direction on a couple of these.

1. The plan document is your best friend here.  Did the plan get written to make everyone eligible at 5/1/2016 or did all employees have to meet eligibility requirements?  What about full year comp or participating comp?  Let's suppose they had to meet eligibility requirements and participating comp.  Deferral comp would be $80,000, May to December.  True up deferral contribution?  I'm leaving that alone for now except to say the employee needs to have a deferral election in place rather than no deferrals and then two months deferrals..... then no December.

2.  You didn't tell us the entry dates.  Monthly entry?  Let's suppose monthly entry.  Match entry date would be 7/1/2016.  $60,000 compensation.  He didn't defer greater than 6% so the match is going to be $2,000.  Nothing to true up.

3.  Class exclusion.  Don't have enough information.... 

Make sure you know the plan limitation year for 415 test.  It may or may not be an issue.

BTW... 100% match of 6%.  Why isn't this plan a safe harbor match with same entry date requirements for simplicity?  No ADP or ACP tests...... you aren't worrying about who is excluded....  and who want's to try to figure out compensation amounts for deferral and then for match.....

[JJ]

Mr. Bagwell,

Thank you so much for your feedback! 

Your assumptions are correct that the plan did not make everyone eligible at 5/1/16.  All employees have to meet eligibility requirements.  The plan uses participating compensation and the entry date for the match is monthly.

The adoption agreement states -

"Each participant who satisfies the eligibility requirements for a Plan Year shall receive an allocation of Employer Matching Contributions for that Plan Year.  Such allocation shall be an amount equal to 100% of the Salary Reduction Contributions that were deferred during that Plan Year while he satisfied the participation requirements for Employer Matching Contributions, and that do not exceed 6% of his Compensation received during that Plan Year while he satisfied the participation requirements for Employer Matching Contributions."

Based on the adoption agreement and assuming the hypothetical employee in my original post has been making 10% deferrals since 5/1/16, am I correct in saying that

1. for purposes of ADP test, his ADP % would be $8,000/$80,000?
2. for purposes of calculating the match, his deferral % is $6,000/$60,000 because he became eligible for match on 7/1/16?

Additionally, the plan excludes a group of employees from receiving the match and fails to satisfy the ratio percentage test.  To run the average benefit test, do we calculate his Ebar using his annual gross comp($120,000), comp since plan inception($80,000) or participation comp for match($60,000)?

[Mr Bagwell]

Yes, I agree with your 1 and 2 calculations.  Match would be 3,600 in your scenario.

In regards to the ABT.... I don't know to be honest, but I think the answer is that you use the participating compensation.  I will defer to the smart ones around here.