Prior Year Term and Profit Sharing Contribution

I have a cross tested 3% safe harbor plan.  The plan uses W-2 compensation and excludes post severance and post year end compensation.  There were a few employees who terminated 12/31/2016 but received their final W-2 in January 2017.  I know that they should receiver the 3% safe harbor non-elective for 2017  However, if the profit sharing allocation conditions are you must be employed on the last day of the plan year or work 1 hour of service in the plan year, would they be entitled to the gateway contribution?  Technically they did not work any hours in the current plan year even though they have wages and hours reported on the census. 

The terminees would be getting the gateway for 2017.  The safe harbor is an ER contribution and the gateway is looking for ER contributions.  

As an aside I believe the hours would most likely follow the dollars.  It seems like most plans I have define "hour of service" as an hour worked in which they were paid or would have been paid..... So the paid and hours don't get disconnected in my mind.

I believe there have been debates on this topic before on this board.  I don't recall how others came down on this subject. 

 

from the 2009 Q and A ASPPA Conference

 

#7  Comp no hours

Participant A terminates employment on 12/28/08 and receives the

final paycheck dated 1/8/09. Therefore, Participant A has 2009

compensation, but no hours are credited.

The Plan is a Safe Harbor 401(k) Plan and/or has a profit sharing

contribution allocated to all participants, regardless of hours.

Will Participant A receive a Safe Harbor contribution and/or profit

sharing contribution for 2009?

If the plan prohibited deferrals out of post-severance compensation,

would that change the answer?

If the plan provided a profit sharing contribution to those who were

employed at the end of the year and used cross-testing in relation to

that contribution, would Participant A be included in the

nondiscrimination test and have to get a gateway contribution for

2009?

First question you have to ask is: what does the plan say? Under, Treas. Reg. §1.401(k)-2(a)(1)(iv): elective contributions relate to compensation that would have been received in the year but for the deferral election or is attributable to services performed during the year. So, depending on what the plan says, the compensation (and the elective contribution associated with that compensation) could be includible in either the prior year or the current year. Under the §415 regs, if the first few weeks rule (§1.415(c)-2(e)(2)) is elected, it's compensation in the prior year and tested in the prior year. See also Rev. Rul. 2009-32. So, the treatment of the compensation and deferral depend on what the plan says. Note that, under Code §402(g), the deferral is included for limitation purposes in the year of contribution.

 

 #48

1 of 6. An employee terminates in December 2009. A final payment

of salary due for services is made in January 2010. The plan does

not use the “first few weeks” rule in the IRC §415 regulations to treat

the January payment as made in 2009. The plan year is the

calendar year. The plan includes a section 401(k) arrangement that

defines compensation eligible for deferral to be section 415

compensation. Is the individual included in the 2010 ADP test, even

though he terminated employment in the 2009 plan year

 

Yes. Since he could defer out of the compensation paid in January 2010, he is an eligible employee under the 401(k) arrangement for the 2010 plan year. The 401(k) regulations do not treat active and former employees differently

 

#50

3 of 6. Suppose instead that the plan is a safe harbor plan that

provides the safe harbor nonelective contribution. Is this individual

entitled to that contribution?

Yes. Since, as discussed in Q-1, the individual is treated as an eligible employee for 2010, he is entitled to a safe harbor contribution. However, if this individual is an HCE, and the plan does not provide the safe harbor contribution to HCEs, then no safe harbor contribution is made on his behalf. The same answer would apply to a safe harbor match if the individual made elective deferrals out of the 2010 compensation

 #52

6 of 6. Suppose in Q-3 that additional nonelective employer

contributions are made to the plan, but this individual does not

receive an allocation of such contributions for the 2010 plan year

because the plan allocates such contributions only to employees

who are employed by the employer as of the last day of the plan

year. To use cross-testing to demonstrate the employer nonelective

contributions are nondiscriminatory, would the individual described

in Q-3 have to meet the gateway contribution test if he is a nonhighly

compensated employee

Yes.

Thanks for your responses!

Remember, though, if the person need additional funding over the gateway due to testing concerns, you need to do an 11-g amendment to get them the additional benefit.

20 hours ago, 401kQ's said:

The plan uses W-2 compensation and excludes post severance and post year end compensation.  

If I'm reading this right and the plan's definition of compensation excludes amounts received post severance, does this definition satisfy 414(s)?  While we have never used it, our VS document allows the exclusion of compensation paid after termination of employment, but cautions that doing so may cause the plan to fail to satisfy 414(s).   With our typical plan having much higher turnover among NHCEs than among HCEs, I would expect it to be difficult to pass 414(s) if you excluded post severance compensation.  IF the compensation definition does satisfy 414(s) and the participant has zero plan compensation for 2017 under the plan's compensation definition,  wouldn't the safe harbor contribution be zero as well?

 

If the compensation definition doesn't satisfy 414(s), the compensation definition for the safe harbor contribution will need to change.  Our VS document automatically changes the SH compensation definition to 415(c) comp if the specified definition fails 414(s) for the plan year.

 

I'm guessing the comment is not that such post year comp is excluded entirely, but rather as

the FT Williams words it

15.  Post Year End Compensation

[  ]   Determine Compensation using Post Year End Compensation

NOTE: If selected, amounts earned during the current year and paid during the first few weeks of the next year will be included in current year Compensation.

 

In other words, since it wasn't checked, the amount paid in the first few weeks of the next year is excluded from the current year and is counted in the next year - so there shouldn't be a problem with 414s

 

Tom you are correct.  Post Year End comp is not included in the current year so the amounts earned their final weeks working in 2016 and paid in 2017 are considered 2017 compensation.  Also, by plan definition this is not Post Severance Comp but regular compensation.