Min Coverage Testing in light of contribution eligibility amendment to

[Guest cascigm]

A profit sharing plan currently has 1,000 hour along with a last day of plan yr. rule regarding eligibility for contribution and forfeiture. Last year the elig. requirement for ps contrb. was 500 hours only.

My question regards min. coverage testing. Do those who were eligible last year and now have a balance in the plan but are not eligible for a contrb. this year need to be included in the test?

[Nate X]

If I understand your question correctly, then definitely yes. The whole point of coverage testing is to make sure you are not discriminating against NHCE's. As long as they met the age, service, and entry date requirement they will always be included in the test unless they become part of an excludable class (i.e. collectively bargained).

[Guest cascigm]

I may be missing the point, my thinking was that for purposes of the min coverage rules, an employee must benefit under the plan. An employee is treating as benefiting un a DC plan for a plan year only if the employee receives an alloction of contributions or forfeitures.

[Nate X]

I see the confusion. In order to "benefit" under a profit sharing plan (not a 401(k) plan), an employee must receive a contribution or forfeiture. And, only employees who "benefit" are included on the coverage test. But, when you are looking at employees as far as the coverage test, a participant is considered as receiving a "benefit" if they work more than 500 hrs or is employed on the last day of the plan year even though they did not actually receive a contribution (they received a "benefit" of zero).

[Guest cascigm]

Your last sentence is where my question lies, does the plan doc or regs decide who "benefits", you saying 500 hrs or last day, do you have a cite?

thanks,

Gary

[Nate X]

The only cite I could refer you to is the IRC 410(B) which does not clearly state the answer that you are looking

for:http://www.tns.lcs.mit.edu/uscode/TITLE_26/Subtitle_A/CHAPTER_1/Subchapter_D/PART_I/Subpart_B/Sec._410.html

If you have a copy of the Pension answer book (1999 version), there's a good example: Q5:21

An employee who became a participant, worked at least 501 hrs or employed on the last day, but did not receive a benefit is a nonexcludable nonbenefiting employee.

[Guest]

Nate is correct, I might word it differently:

to 'benefit' you have to receive a contribution/forfeiture.

If you WERE a participant and didn't receive a contribution/forfeiture then you are includable and not benefitting if:

you are still employed at the end of the year

if you terminated and worked more than 500 hours.

note: the terminee/500 hrs is an option. for example, lets say your plan has a last day requirement.

Fred quits so receives no contribution. if he worked 500 hours or more I must include him.

If he worked 250 I have the option of including him. If he was an HCE it might help to include him, as long as I treat all terminees the same.

[Guest Stephanie Bosworth]

Generally, an employee is treated as benefiting with respect to a profit sharing contribution only if he or she actually receives a contribution. (See note about snapshot testing below.) An employee is disregarded in performing the coverage test (i.e., left out of the numerator and denominator of the ratios) if he or she did not receive an allocation, worked no more than 500 hours, and terminated before the last day.

Here is the regulation: 1.410(B)-6(f)(1)

Certain terminating employees--(1) In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if--

(i) The employee does not benefit under the plan for the plan year,

(ii) The employee is eligible to participate in the plan,

(iii) The plan has a minimum period of service requirement or a requirement that an employee be employed on the last day of the plan year (last-day requirement) in order for an employee to accrue a benefit or receive an allocation for the plan year,

(iv) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement,

(v) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (f)(1)(v), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year), and

(vi) If this paragraph (f) is applied with respect to any employee with respect to a plan for a plan year, it is applied with respect to all employees with respect to the plan for the plan year.

You may want to consider snapshot testing described in IRS Revenue Procedure 93-42. If you increase the minimum percentage from 70% to 77%, you can pick a representative coverage date before the last day of the plan year and assume that all participants on that date satisfy the minimum contribution allocation requirements (i.e., treat them as benefiting, even if they do not actually receive a contribution).