Last Day Entry Date/Compensation for testing purposes

[Guest]

401(k) Profit Sharing Plan has three month eligibility and entry date on the last day of the plan year.

Plan document defines compensation for allocation in the initial year of participation as entire plan year wages.

For testing (Average Benefits Percentage Test and Rate Group Testing) can wages from the date of entry be used. For example, the testing compensation for a participant that enters on the last day of the plan year would be compensation for that day only?

[Guest]

technically, that 'idea' or 'scheme' would work based on the regs, and I have even seen it suggested. it creates an artificially large E-BAR and enables a plan to pass the avg ben pct test. In a less dramatic way, and ee who enters mid-year but gets a contribution based on full year comp is the same type of deal.

all that being said,

1. make sure how the document defines 414(s) comp. (some specifically state, from date of entry)

2. in a 401(k) plan I believe that strategy means you forego using statutory exclusion option. remember, there is a consistancy rule. if you don't statutory exclude for 410(B) you can't statutory exclude on the ADP test. and how many people defer with 3 months eligibility? lots of 0's on the ADP test.

3. those that suggested this strategy for cross-tested plans are the reason the cross-tested plans have come under fire recently. Since the proposed regs will now require a

'minimum' contribution, this 'gimmick' won't achieve what it could at one tie.

Don't get me wrong! I am not implying that is what you have in your situation, yours could well be a legimate reason for those entry dates. It gets around the age old 5500 question ees at end of year = ees at begining of next year.