Gateway Minimum Contribution

[TH 401k]

The plan has a total of 14 eligible participants, comprising 4 Highly Compensated Employees (HCEs) and 10 Non-Highly Compensated Employees (NHCEs). It uses statutory eligibility and includes both Safe Harbor Matching and Profit Sharing under a new comparability formula.

The client has elected to provide a Profit Sharing contribution of 5.6% to all HCEs and 1.86% to only 4 NHCEs. Using ASC software, we performed cross-testing under the Annual Accrual method with Permitted Disparity.

Based on the plan design and testing methodology, it is our understanding that the plan is not subject to the Gateway minimum contribution requirement because only Profit Sharing no other nonelective contribution. Accordingly, we have overridden the status of the remaining 6 NHCEs to “N/A” to facilitate passing the nondiscrimination tests. Both the Average Benefit Percentage Test and the Rate Group Test have passed.

However, during the Coverage Test for Profit Sharing, the plan initially failed due to an NHCE ratio of 40% (4 out of 10 NHCEs receiving contributions). In cross testing, concentration ratio was calculated at 71%, with the Safe Harbor threshold at 41.75%, Non-Safe Harbor at 31.75%, and the midpoint at 36.75%. Since the coverage ratio fell below the Safe Harbor threshold, the plan failed through Average Benefit Percentage Test.

To ensure the plan passes the coverage test under the Average Benefit Test, I allocated a nominal $1 Profit Sharing contribution to one additional NHCE, thereby treating them as benefiting under the plan. This increased the NHCE benefiting count from 4 to 5, raising the coverage ratio to 50%. Since the Safe Harbor threshold is 41.25%, the plan is deemed to pass the coverage test.

However, I’m uncertain whether allocating just $1 is sufficient for compliance purposes, or if I should have applied the same 1.86% contribution that was provided to the other NHCEs. The client has clearly stated they do not wish to increase contributions or modify the existing allocation structure.

I’ve proceeded with the $1 allocation to meet the testing requirement, but I’m posting this for feedback—would appreciate any insights on whether this approach is acceptable under current compliance standards.

[Lou S.]

If you are at $0, and pass all testing you don't need gateway for that employee. Once an NHCE gets any employer allocation, even just $1, they need to get gateway. So yeah that employee need gateway.

I'm not sure why you think profit sharing doesn't trigger gateway. Any non-match employer allocation will trigger a gateway in most plans like this. That is safe harbor non-elective, profit sharing, and reallocation of forfeitures being the most common.

There are some general test exceptions to gateway in the regs but it doesn't sound like your plan design meets any of those exceptions.

 

[Lou S.]

Oh and is this plan top-heavy? I hope not, because if it is you lose the deemed non-top heavy exemption for being a SH match once you make any other employer allocation. 

Maybe this is a odd plan where every NHCE is contributing and receiving a match large enough to satisfy TH but that's not usually my experience in plans like these and you might find that 1,86 for some might have to become closer to 3% for all.

[CuseFan]

Agreed, any NHCE who benefits under 401(a) portion of the plan must get gateway which, for an HCE rate of 5.6%, is 1.866667% or 1.87%, not 1.86%. 

Also, to pass coverage using average benefits the first requirement is a reasonable classification. What was the reasonable classification used to determine the 4 (or 5) NHCEs out of 10 to give profit sharing? Picking the youngest and/or lowest paid doesn't fly the reasonable plane. You don't need reasonable classification once you get to nondiscrimination testing, but you can't fly there until your coverage flight gets off the ground.

[justanotheradmin]

absent the reasonable classification that CuseFan mentions, the standard ratio percentage test applies(70%). In addition to what everyone else already said about gateway and top heavy. 

Everyone in their own group - which is often how its written into the document - isn't a reasonable classification. at least not that I've ever heard accepted. 

[TH 401k]

2 hours ago, Lou S. said:

If you are at $0, and pass all testing you don't need gateway for that employee. Once an NHCE gets any employer allocation, even just $1, they need to get gateway. So yeah that employee need gateway.

I'm not sure why you think profit sharing doesn't trigger gateway. Any non-match employer allocation will trigger a gateway in most plans like this. That is safe harbor non-elective, profit sharing, and reallocation of forfeitures being the most common.

There are some general test exceptions to gateway in the regs but it doesn't sound like your plan design meets any of those exceptions.

 

@Lou S. Could you provide an overview of the exemptions applicable in various other situations? The plan is not top heavy.

[Lou S.]

1.401(a)(4)-8(b)

See - 1.401(a)(4)-8(b)

(B) For plan years beginning on or after January 1, 2002, the plan satisfies one of the following conditions --

(1) The plan has broadly available allocation rates (within the meaning of paragraph (b)(1)(iii) of this section) for the plan year;

(2) The plan has age-based allocation rates that are based on either a gradual age or service schedule (within the meaning of paragraph (b)(1)(iv) of this section) or a uniform target benefit allocation (within the meaning of paragraph (b)(1)(v) of this section) for the plan year; or

(3) The plan satisfies the minimum allocation gateway of paragraph (b)(1)(vi) of this section for the plan year.

 

 

[TH 401k]

2 hours ago, CuseFan said:

Agreed, any NHCE who benefits under 401(a) portion of the plan must get gateway which, for an HCE rate of 5.6%, is 1.866667% or 1.87%, not 1.86%. 

Also, to pass coverage using average benefits the first requirement is a reasonable classification. What was the reasonable classification used to determine the 4 (or 5) NHCEs out of 10 to give profit sharing? Picking the youngest and/or lowest paid doesn't fly the reasonable plane. You don't need reasonable classification once you get to nondiscrimination testing, but you can't fly there until your coverage flight gets off the ground.

@CuseFan Is it necessary to benefit a total of 7 NHCEs instead of 4 to satisfy the coverage test requirements by allocating 1.87%? Alternatively, are there any other applicable methods for meeting the test in this scenario?

[TH 401k]

5 minutes ago, Lou S. said:

 

1.401(a)(4)-8(b)

See - 1.401(a)(4)-8(b)

(B) For plan years beginning on or after January 1, 2002, the plan satisfies one of the following conditions --

(1) The plan has broadly available allocation rates (within the meaning of paragraph (b)(1)(iii) of this section) for the plan year;

(2) The plan has age-based allocation rates that are based on either a gradual age or service schedule (within the meaning of paragraph (b)(1)(iv) of this section) or a uniform target benefit allocation (within the meaning of paragraph (b)(1)(v) of this section) for the plan year; or

(3) The plan satisfies the minimum allocation gateway of paragraph (b)(1)(vi) of this section for the plan year.

 

 

@Lou S.What is your opinion on this plan to meet the coverage and cross-testing requirements? Do you think there's a better way to achieve compliance?

[John Feldt ERPA CPC QPA]

You can test on a contributions basis to avoid gateway. That would increase the 1.87% to something higher to be at the HCE rates with imputed disparity.

But first you must pass coverage, so start by allocating something to get to 70% coverage, say $100 to enough NHCEs to get your 70% - maybe pick the lowest paid NHCEs, or whatever is preferred by the employer  

Coverage passes, so let’s now move on to nondiscrimination testing. Pick just enough NHCEs to get that higher PS needed to be at the HCEs midpoints (use imputed disparity if that helps). Run ABPT either on a benefits basis or a contributions basis, whichever is better. If the ABPT passes, you’re done. Otherwise, troubleshoot what is needed.

[TH 401k]

12 hours ago, John Feldt ERPA CPC QPA said:

You can test on a contributions basis to avoid gateway. That would increase the 1.87% to something higher to be at the HCE rates with imputed disparity.

But first you must pass coverage, so start by allocating something to get to 70% coverage, say $100 to enough NHCEs to get your 70% - maybe pick the lowest paid NHCEs, or whatever is preferred by the employer  

Coverage passes, so let’s now move on to nondiscrimination testing. Pick just enough NHCEs to get that higher PS needed to be at the HCEs midpoints (use imputed disparity if that helps). Run ABPT either on a benefits basis or a contributions basis, whichever is better. If the ABPT passes, you’re done. Otherwise, troubleshoot what is needed.

@John Feldt ERPA CPC QPA The plan doesn’t have a uniform Profit Sharing allocation and no allocation condition (last day or hours conditions). Contributions are split into three groups (This is a separate scenario aimed at making the plan pass the coverage test)

Group 1: HCEs receiving 5.6%

Group 2: 7 NHCEs receiving 1.87%(Example - employees achieved target)

Group 3: 3 NHCEs receiving 0% ( not achieved)

I’m planning to run nondiscrimination testing using the allocation method with permitted disparity. If the plan passes both the Average Benefit Percentage Test and the Rate Group Test, do I still need to meet the Gateway Minimum Contribution requirement, since the contributions are not the same for all all employees or NHCEs? Just looking for clarity on whether Gateway applies in this case.

If the plan is tested using the benefit accrual rate method and includes only Profit Sharing contributions, is it automatically subject to the Gateway Minimum Contribution requirement?

If so, in the scenario described  1st scenario  above —where 4 NHCEs receive 1.87% and 6 NHCEs receive 0% — would it be necessary to provide the 1.87% contribution to all 10 NHCEs in order to satisfy the Gateway requirement? Alternatively, is the plan not subject to the Gateway Minimum Contribution requirement because it includes only Profit Sharing contributions and no other type of nonelective contribution?

[CuseFan]

It would not be subject to gateway if you are not cross-testing and are testing on contributions. 

You still need to satisfy coverage. If the document is set up with those 3 groups then that could be a reasonable classification and you can continue with average benefits. Then if you need to move someone from group 3 to group 2 to pass you could do via an 11g amendment. If the document just says individual groups then I think it's covering 7 and passing the ratio percentage test or nothing.

[TH 401k]

21 hours ago, CuseFan said:

It would not be subject to gateway if you are not cross-testing and are testing on contributions. 

You still need to satisfy coverage. If the document is set up with those 3 groups then that could be a reasonable classification and you can continue with average benefits. Then if you need to move someone from group 3 to group 2 to pass you could do via an 11g amendment. If the document just says individual groups then I think it's covering 7 and passing the ratio percentage test or nothing.

@CuseFan@John Feldt ERPA CPC QPA@Lou S.The adoption agreement does not specify each groups. However, the employer has followed a discretionary classification approach for each year differently.

In this case, the client initially provided a Profit Sharing contribution of 5.6% to all HCEs, 2% to 4 NHCEs, and 0% to the remaining 6 NHCEs. Upon clarification, the client confirmed that the 4 NHCEs receiving contributions were considered “target-achieved” employees for the year.

Based on this classification, I ran the 401(a)(4) nondiscrimination testing in ASC using both the allocation rate method and the allocation rate method with permitted disparity. The plan failed under both approaches. However, when tested under the accrual rate method, the plan passed the Average Benefit Percentage Test (ABPT) and Rate Group Test, but failed the Gateway Minimum Contribution requirement. Additionally, the plan failed coverage testing.

To satisfy the coverage test, three additional employees needed to be treated as benefiting under the plan. After discussing this with the client, they agreed to allocate 2% contributions to those three employees to make the plan pass coverage.

Initially, I assumed that the Gateway Minimum Contribution requirement would not apply since the plan has only Profit Sharing contributions and SH match and no other nonelective contributions.

Later, I came to understand that when 401(a)(4) testing is performed using the accrual rate method, the plan is automatically subject to the Gateway Minimum Contribution requirement.

Given this, should I now request the client to provide the minimum Gateway contribution to all NHCEs in order for the plan to pass the Gateway test?  

Also, when a plan is tested under the 401(a)(4) accrual rate method, is it automatically subject to the Gateway Minimum Contribution requirement by default?

 

[Lou S.]

I depends how good you feel about using reasonable classification or not and how you would defend in the event of an IRS audit. The safest most defensible way is the 70% ratio percentage test that has been presented above but that's not to say a more aggressive approach might work. Sounds like a billable consulting project.

[CuseFan]

2 hours ago, TH 401k said:

Also, when a plan is tested under the 401(a)(4) accrual rate method, is it automatically subject to the Gateway Minimum Contribution requirement by default?

Lou answered that on a prior response. Only those NHCEs that benefit must receive gateway, so you can have zeroes in there but you must benefit enough NHCEs to pass testing on ratio percentage.