New Gateway Rules

[Guest Karen Szy]

Under the new gateway rules is it true that you cannot have a last day of year, 1000 hour rule in order to get a contribution or you will not pass the gateway.

[pmacduff]

Karen - I don't know if you are an ASPA (American Society of Pension Actuaries) member or not, but the November/December issue of the Pension Actuary publication (page 16) states that in a discussion between ASPA's Government Affairs Committee and the Treasury; "ASPA's representatives raised a number of issues with respect to the proposed new comparibility plan regulations including confirmation that only participants who "benefited" under a plan's allocation formula were entitled to a gateway allocation. Therefore, it would be acceptable for a new comparibility plan to contain a "last day" requirement for an allocation." This was written by Jeffery C. Chang, APM from the law firm of Chang, Ruthenberg & Long Law Corporation. He specializes in Employee Benefits. I guess it is not clear whether or not the Treasury confirmed the notion, only that ASPA requested that they do so.

[Guest]

do you mean 'gateway' -for use with new comparability plans begining 2002 or do you mean

'safe harbor 401 k' in which there are no hours requirement or last day provision.

you could have immediate eligibility, but a 1 year way for safe harbor contributions.

[Guest Keith N]

I don't mean to beat a dead horse, but I'm just looking for confirmation now that final Regs are out .... are we/you still comfortable that you can have a cross tested plan in 2002 that uses the 5% gateway and a last day and/or 1000 rule?

So if a NHCE terms prior to the end of the year they don't need to get the 5% allocation?

What if they are active at the end of the year, but work less than 1000 hours? Could I get away with $0 (or 3% if plan is top heavy)?

[Guest Bandb]

The final regs seem pretty clear, under Explanation of Provisions, B. Gateway... "Thus an individual who does not otherwise benefit under the plan...is not an employee under these regulations, hence not an NHCE, and need not be given the...gateway."

[Richard Anderson]

For 2002 I have a New Comparability plan with three allocation classes:

1. HCEs employed at year end

2. NHCEs employed at year end

3. Employees terminated before year end

The plan has no last day or hours requirement to be eligible for the employer contribution. Providing that the plan otherwise satisfies 401(a)(4), will the following allocation to the classes satisfy the gateway test?

1. 25%

2. 5%

3. 0%

The plan would be set up this way to have the option of not including terminated participants if a4 could be passed, but including them only if necessary to pass non-discrimination testing.

Is class 3 considered "not benefiting" and therefore not required to get the 5% gateway minimum?

[Medusa]

I can't say for sure, but it seems to me that the terms of the plan would specifically have to preclude the individuals from getting an allocation, in order to exclude them from the gateway. At least I think that's what the IRS would say.

[Belgarath]

I'm not sure I agree. The term employee, as used in the new regs, is defined in 1.401(a)(4)-12 as an employee within the meaning of 1.410(B)-9 who benefits under the plan for the plan year...

Now, assuming you pass the nondiscrimination tests as you indicated, then those employees receiving a zero allocation are not employees under the regulation, and therefore don't need to be given the Gateway allocation.

At least, this is the interpretation we're going to take until there is any guidance otherwise. I think it's statutorily correct, at least. Hopefully the IRS won't think otherwise.

[Guest merlin]

Q&A 46 of the IRS Q&As at the 2001 ASPA says that employment a the end of the year is not a reasonable classification for purposes of the average benefit test. What effect,if any, does this have on your allocation classes?

[Guest Keith N]

Belagarath, Merlin & Madusa...... All working together for the greater good?

There is some powerful magic afoot!

[AndyH]

merlin, first, that was a matter of some considerable disagreement (Paul Schultz disagreed with that answer on stage and Wickersham gave a different answer last year), and second, allocation groups or classes don't have to be reasonable. You could have classes with all people who have white or blue hair if you wish; reasonable is only an issue with respect to eligibility to participate in the plan because it's needed to get to use the average benefits test.

I think both Medusa and Belgarath make valid points.

[Guest merlin]

AndyH-Now that you mention it your description of allocation classes by hair color sounds familiar.Maybe Tom Poje said it before.And the reasonable classification issue is only relevant to coverage. Thanks for clearing the fog.