Top heavy contribution for terminees brought in to pass coverage test

[DP]

We have a calendar year cross-tested PS plan with a last day rule. On 10/2/00 ten employees walked out of the office leaving behind five HCE's and two NHCE participants. In order to pass the coverage test, I brought in the terminated participants who had the most hours and was able to pass coverage by giving contributions to six of the terminees.

For the cross-tested formula, I have three categories: 1 - physicians, 2 - actively employed staff members, and 3 - terminated staff members. Do the Class 3 employees have to receive a minimum 3% top heavy contribution if Classes 1 and 2 receive in excess of 3%? The plan is top heavy for 2000.

[Guest]

the only participants who must receive a top-heavy minimu are those non-key employees who have not separated from service by the end of the year.

if a plan fails testing you are allowed to put in a corrective amendment to allow more people to receive a contribution, generally it must be a 'meaningful' benefit.

for instance, if all the terminees were also 0 vested the IRS may frown. of course, the question might be whether or not you have a partial termination or not.

[david rigby]

I agree with Tom. His last statement is important to note. More info on partial terminations:

http://benefitslink.com/boards/index.php?showtopic=244

[DP]

Thanks for the answer on the top heavy contribution.

Since these ten employees voluntarily terminated their employment, does a partial termination apply to this employer?

[MR]

Two thoughts -

1. I don't think it matters whether or not the terminations were voluntary.

2. If your plan is a cross-tested plan, why do you need to pass the 70% coverage test? You are passing coverage using the average benefits test, yes? The ratio percentage test doesn't seem to be necessary.

Agree?

[Guest]

MR-

the message indicated that 10 nhces quit, leaving 2 nhces left. since the nhces left 10/2 I would assume they all worked 500 hours and therefore must be included in testing (with 0 if they receive no contribution)

this means only 2/12 NHCEs benefit = 16.67 for the ratio percentage test.

one of the requirements for the avg benefits test is that the rato % must be > midpoint for each HCE. since the midpoint is > 20%, there is no way the plan would pass.

In additon to that problem, adding 10 zeroes to the avg ben pct test will produce a very low number for the nhces, so this test will fail as well.

I don't believe there are any clear regs regarding partial terminations. It is probably more up to the IRS agent if the plan was audited. we had one plan with high termination rate (30%), but it was a software company and that is not unreasonable.

when 10 people quit 'voluntarily', and apparently 'all at once' there is usually something more behind the issue. given the fact the plan is cross tested, I would be surprised if it wasn't deemed to be a partial termination. if it was a regular profit sharing plan maybe one could argue otherwise - I think its one of those 'things' that comes along with cross testing. but that is only my opinion

[david rigby]

Again, Tom is correct. Notice in the link above, the statement, "the IRS presumes all terminations are involuntary unless the employer shows otherwise." The burden of proof is on the ER.

I usually recommend to clients facing a partial termination that the plan be amended to award 100% vesting, assuming that the "event" can be well-defined. The purpose is to head off any "scrutiny" that may come from participant count information (i.e. 5500,5310, etc) that shows (or implies) significant number of nonvested terminations. Of course, that is a decision that very often is affected by the amount (both absolute and relative) of the $ involved.