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Statutory Exclusion - excluded group fails 401(a)(4)


Tom

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Plan provides for immediate entry for deferrals and Safe harbor non-elective.  Profit Sharing requires 12 months of service.   Plan is not top heavy. 

In 2023 an owner's son got hired and deferred and is getting the safe harbor along with 6 other NHCEs.   They all are getting the 3% safe harbor.  I am testing the plan using cross testing.  This passes non-discrim testing for the >12-month group but fails for the <12-month group.  I'll have to allocate profit sharing to the <12-month group to pass testing.  Or does it need to be allocated as QNEC?  In hindsight, the plan should have excluded HCEs from the safe harbor non-elective.  But that is obviously too late.

Thank you in advance for any comments.

Tom

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Ah I was going to ask that!  The under 1-year group participants are all getting the 3% non-elective safe harbor, nothing more.  So it would pass testing on an allocation basis.  I was not aware the plan could test both groups differently.   (Does anyone know how to get Relius reports to show that?)

I did get cross-testing to work by including the excludable group with some profit sharing.  But since the plan says they are not eligible for profit sharing, if they go this route, does the plan have to be amended retroactively for 2023 to expand PS eligibility or can allocating profit sharing simply be done to satisfy testing?

Thank you!

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Ok that makes sense as the program was telling me that.  I'm actually testing it now on al allocation basis which is working fairly well.

 

Thank you

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John - last question.  So I can pass the >12 month group testing on a benefits basis.  I can give the <12 months people the 5% gateway.  This <12 month group would pass on an allocation basis (there is one HCE in this group) but I can't test this group on an allocation basis and the >12 month group on an accrual basis right?  I see no way to do this in the admin system.

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You can test those under 21 and 12 months on a contribution basis and I would think the 3% SH would be all you need in that group.

The group over 21 and 1 YOS can be cross-tested and the NHCEs benefitting with any nonelective in that group will get at least the minimum gateway.

I would think the system could easily do that. Otherwise perhaps look for the system instructions for restructuring or how to test using component plans 

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Wow - that is quite a good solution.  I can do that.  Perhaps Relius can do that without merging reports but in the testing screen you choose statutory exclusion and then test either allocation basis or accrual basis.  Any Relius users know anything different?

 

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Sorry one last question on this.  I want to be sure since I'm sort of tricking the system.  So I will test the >12 month group on an accrual/cross-tested bass and provide gateway to NHCEs in that group and enough PS to pass nondiscrimination testing. 

I will test the <12 month excludable group on an allocation basis which passes easily since they are all just getting the 3% safe harbor, no profit sharing.  There is 1 HCE (an owner son ) in this group.  My last question - must the the NHCEs in the <12 month excludable group meet minimum gateway?  If so they would need to get 2% profit sharing.

Thank you!

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  • 3 weeks later...
On 1/3/2024 at 12:50 PM, John Feldt ERPA CPC QPA said:

You can test those under 21 and 12 months on a contribution basis and I would think the 3% SH would be all you need in that group.

The group over 21 and 1 YOS can be cross-tested and the NHCEs benefitting with any nonelective in that group will get at least the minimum gateway.

I would think the system could easily do that. Otherwise perhaps look for the system instructions for restructuring or how to test using component plans 

Hi John, sorry for bringing this up several weeks later as I was just researching this subject for a plan of mine.  I used component testing and ASC required the gateway to those in component 2 (run on contributions basis).  It's a top heavy plan, so I figured I could just give those in C2 3% but the testing showed it failed gateway.     

While I was researching, I saw the below post from 2013 and you commented that those being tested on contributions basis DID need to get the gateway.  There was also a post from 2012 where both you and Tome Poje both quoted from the regs: "In addition, the minimum allocation gateway of §1.401(a)(4)-8(b)(1)(vi) and the minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this section cannot be satisfied on the basis of component plans."

Am I missing something? 

Thanks!

 

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This thread is discussing OEEs. Employees under age 21/1YOS can be tested separately from everyone else. When they are, the OEEs usually have no HCEs or they all have a uniform allocation, and if so, the benefits given to the OEEs won’t need cross-testing to pass testing so no gateway applies to them, period. But, if the OEEs are needed to help the non-OEEs (over age 21/1YOS group) to pass testing, then any minimums that apply to those over 21/1 also apply to those under 21/1, such as a gateway.

Component plan testing is different in that it is an option that can be applied to the plan in a way that is not cut off at age 21/1YOS to delineate the components. If any component is cross-tested, then the gateway applies to all the components. If none of those components needed to use anyone under 21/1 to pass, the OEEs, then those OEEs are still not required to get the gateway unless the OEE group itself was cross-tested (super rare).

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On 1/22/2024 at 2:16 PM, John Feldt ERPA CPC QPA said:

This thread is discussing OEEs. Employees under age 21/1YOS can be tested separately from everyone else. When they are, the OEEs usually have no HCEs or they all have a uniform allocation, and if so, the benefits given to the OEEs won’t need cross-testing to pass testing so no gateway applies to them, period. But, if the OEEs are needed to help the non-OEEs (over age 21/1YOS group) to pass testing, then any minimums that apply to those over 21/1 also apply to those under 21/1, such as a gateway.

Component plan testing is different in that it is an option that can be applied to the plan in a way that is not cut off at age 21/1YOS to delineate the components. If any component is cross-tested, then the gateway applies to all the components. If none of those components needed to use anyone under 21/1 to pass, the OEEs, then those OEEs are still not required to get the gateway unless the OEE group itself was cross-tested (super rare).

ahhh I didn't catch that.  For some reason when I searched component and 401(a)(4) testing, this thread came up.  Thanks for your knowledge!  I appreciate it.  I started to question everything I ever learned. haha

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