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Compensation and the minimum gateway test


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Our software for minimum gateway purposes uses 414(s) comp for the 1/3 test and 415(c)(3) comp for the 5% test.

Example: employee became eligible 7/1/2023 -total wages for the year $50,000 of which $25,000 was earned after the plan entry date.  The person terminated so top heavy does not apply.  The plan defines compensation as W-2 wages.  But the person has to get the minimum gateway as the plan is cross-tested.

The Question: Is $25,000 compensation used for both the 1/3 test and the 5% test or must $50,000 be used for the 5% test.  The software seems to indicate $25,000 is used for the 1/3 test and $50,000 is used for the 5% test. This could be an input error.   I didn't check the system comp fields, only the output report.  

Thank you for any help in clarifying this!

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On 1/20/2024 at 11:06 AM, Tom said:

The plan defines compensation as W-2 wages.

Depends upon the specific provisions of your document. The 5% test is based on 415 compensation, but your document CAN limit that 415 compensation to the period of eligibility. So you may be able to exclude 415 compensation prior to the date of participation, or you may need to use full year compensation. You'll need to check the specific document provisions.

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The 1/3 test uses 414(s) compensation. The 5% test uses 415(c) compensation.

For purposes of the gateway, BOTH may be measured either over just the period of plan participation, or over the plan year. This is because the option to use participation compensation for testing does not come from 414(s); it is found in the definition of "plan year compensation" in 1.401(a)(4)-12.

If your system is excluding the pre-entry compensation for the 5% test, you may have it coded incorrectly.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.

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