Combo Plan - gateway requirement

Hi all

Having another senior moment.

Looking at a combo plan (both 401k and cash balance plans are top heavy) where the existing 401k plan has safe harbor match (changed to non elective for 2021) and ps allocation is last day+1000 hours and everyone in their own group. Top heavy also requires last day rule. The cash balance will be a new plan effective 1/1/2020.

One employee (DOP 1/1/2019 and non-HCE) terminated 1/10/2020 and rehired 10/4/2020. He deferred a bit in the year and gets the safe harbor match.

He is excluded under the CB plan.

Gateway requirement is 5%

Performed the combo testing and the system did not require a gateway allocation to him and passed the testing (I have others who satisfy the combo test and helping to pass the test).

He should get at least 3% as the 401k plan is top heavy and did not get a warning on that either, correct? As it is safe harbor match, should have 3% of allocation, at least.

Something does not smell right.

I do not believe it matters if he worked under or over 500 hours.

Thank you for your comments.

The safe harbor match contribution counts towards the top heavy minimum. If his safe harbor contribution was equal to at least 3% of his annual comp then he does not need to receive any PS, assuming coverage is satisfied.

If he gets any PS in order to satisfy the top heavy minimum, then he will need to get the gateway unless he is otherwise excludable.

Hi C.B.

As I said senior moment since I only with non elective safe harbors in general.

Thank you for reminding me about the top heavy coverage.

If I understood you correctly, if he was in both top heavy plans and only DC plan provides the top heavy, not only he will get the safe harbor match but he will also get 5% gateway as a ps allocation, correct?

Much appreciated.

That would be my understanding as well assuming the plans are written that the DC plan satisfies the TH min. He would then be entitled to the gate way contribution if it is more than 5% which it often but not always is.

Hi Lou, thank you confirming my understanding.

You said the participant is excluded from the DB plan. In other words he is not eligible for a benefit accrual in the DB plan for 2020. Therefore he does not have to receive the DB top heavy minimum, which is provided as a 5% contribution in the DC plan.

He is a participant in the DC plan and he was employed on the last day of the year, so he does have to receive the DC top heavy minimum, which is a 3% contribution in the DC plan. If the 3% is not satisfied by the safe harbor match, then a profit sharing contribution will have to be made to make up the difference. If he gets any profit sharing at all, then he will have to get the gateway minimum.

Hi C.B.

You are correct in all your assumptions.

His safe harbor match is over 3% so his top heavy is satisfied and as he gets on PS allocation due to 1000 hour requirement, he is not getting gateway either.

Please allow me a follow up question, just curious and thought of it.

If he was making no deferrals, he would not be getting any safe harbor match. If this was a dc plan only and no ps allocation, no issue of the top heavy.

What happens in a combo plan assuming that he participates only in the dc plan and also in both plans? Never seen this but curious.

16 hours ago, Jakyasar said:

What happens in a combo plan assuming that he participates only in the dc plan and also in both plans? Never seen this but curious.

Huh? What does "he participates only in the dc plan and also in both plans" mean?

Are you asking what would happen if he is a participant, meaning he met eligibility requirements, but does not defer? He would end up getting the whole gateway. It does seem counter-intuitive: if he defers 3%, he gets a total 3% employer contribution, from the safe harbor match and nothing in profit sharing. If he defers 0, he gets a 5% total employer contribution, since the top heavy minimum gets provided via profit sharing, and then he has to get the whole gateway. If he defers 2.99%, he gets 2.99% safe harbor match, plus an extra 0.01% profit sharing to meet the top heavy minimum, but now he's subject to the gateway so that 0.01% is increased to 5%, and his total employer contribution ends up being 7.99%.

Hi C.B.

I meant to ask as 2 separate scenarios. Scenario 1, if only in the dc plan and excluded from the cb plan. Scenario 2, if included in both the dc and cb plans. In both scenarios chooses not to defer. Only the dc plan provides top heavy requirements.

Would any of your comments change?

I got to be more specific next time as I type too fast sometimes.

Have a great weekend and really appreciate your comments/time.

So, basically it works like this:

Step 1: Determine the participant's top heavy minimum. If they are a participant in the DB plan, and they worked 1000 hours (assuming the DB plan requires 1000 hours to earn an accrual), then their top heavy minimum is 5%. If not, but if they are a participant in the DC plan, and they were employed on the last day of the year, their top heavy minimum is 3%.

Step 2: Add up all employer allocations from all sources in the DC plan - safe harbor match, discretionary match, QNECs, whatever they've got. If those together satisfy the top heavy minimum (which might be either 3% or 5%, as determined in step 1), then you are done.

Step 3: If the top heavy minimum was not satisfied in step 2, add profit sharing until it is satisfied.

Step 4: If the participant has any non-elective allocations (SHNEC, profit sharing (including whatever was added in step 3), DB accrual, etc) then add whatever additional profit sharing is needed to get them to the gateway minimum.

Very interesting and educational, thank you

Have a great weekend.

On 12/10/2020 at 2:10 PM, C. B. Zeller said:

The safe harbor match contribution counts towards the top heavy minimum. If his safe harbor contribution was equal to at least 3% of his annual comp then he does not need to receive any PS, assuming coverage is satisfied.

If he gets any PS in order to satisfy the top heavy minimum, then he will need to get the gateway unless he is otherwise excludable.

Follow up with different scenario:

Combined plans are top heavy (DC on its own is not TH)

DC plan:

eligible for deferrals 1 month
eligible SHNE 1 YOS

CB plan:

eligible 1 YOS/1,000 hours
allocation condition 1,000 hours 

participants that are eligible to defer but do not enter the CB plan only entitled to 3% top heavy and they do not get SHNE so it has to be allocated as PS.

they don’t have to get gateway b/c they are otherwise excludable per statutory eligibility?  (assuming the oe group has no HCEs)

On 3/4/2021 at 8:46 AM, HC2020 said:

Combined plans are top heavy (DC on its own is not TH)

Are the plans part of a required aggregation group? (The answer is yes if both plans cover any Key employees, which they probably do. It's also yes if they are being tested together for 401(a)(4) which it appears they are.)

I agree with your conclusion. If an employee was eligible to defer but has not met eligibility for the DB plan then they need the 3% DC top heavy minimum, and if they have not met statutory eligibility then they can be disaggregated on the general test and so would not need to receive the gateway.

On 12/11/2020 at 1:25 PM, C. B. Zeller said:

So, basically it works like this:

Step 1: Determine the participant's top heavy minimum. If they are a participant in the DB plan, and they worked 1000 hours (assuming the DB plan requires 1000 hours to earn an accrual), then their top heavy minimum is 5%. If not, but if they are a participant in the DC plan, and they were employed on the last day of the year, their top heavy minimum is 3%.

Step 2: Add up all employer allocations from all sources in the DC plan - safe harbor match, discretionary match, QNECs, whatever they've got. If those together satisfy the top heavy minimum (which might be either 3% or 5%, as determined in step 1), then you are done.

Step 3: If the top heavy minimum was not satisfied in step 2, add profit sharing until it is satisfied.

Step 4: If the participant has any non-elective allocations (SHNEC, profit sharing (including whatever was added in step 3), DB accrual, etc) then add whatever additional profit sharing is needed to get them to the gateway minimum.

I hope I'm not too confused.  If he works 1000 hours but is not employed on the last day of the plan year, what is the top heavy, and where is it paid.  Since not employed on the last day, no 3% DC minimum.  But has to get the DB minimum.  Can he still get 5% in the DC plan?  Or the only option is to now get the DB 2% accrual minimum.

Your Plan documents should spell out and coordinate who gets what top-heavy minimum and where. If a person is in the DB plan but the 5% contribution in the DC plan is being used to satisfy TH min, you want to make sure he's eligible to get the 5% TH minimum in the DC plan if he accrues a benefit in the DB plan. Which may or may not also trigger a gateway contribution as well.

12 minutes ago, Lou S. said:

Your Plan documents should spell out and coordinate who gets what top-heavy minimum and where. If a person is in the DB plan but the 5% contribution in the DC plan is being used to satisfy TH min, you want to make sure he's eligible to get the 5% TH minimum in the DC plan if he accrues a benefit in the DB plan. Which may or may not also trigger a gateway contribution as well.

Thanks for your comments.  Unfortunately, we have a bunch of plan documents that are not clear at all as to what happens in these kinds of strange situations.

Sometimes you have to read between the lines, but the answer will be there somewhere. Start with the DB plan - it has to say somewhere to which plan the top heavy contributions will be made. If it says to the DB plan then you are stuck with the 2% accrual.

If it says to the DC plan, then you have to go and look at what the DC plan says. If the DC plan allows for top heavy minimum contributions to be made on behalf of the employer's DB plan, then go ahead and make the 5% to the DC plan.

If the DC plan doesn't acknowledge the DB plan for top heavy minimums, but it doesn't have a last day allocation condition for profit sharing, then you can still make the 5% to the DC plan, just call if profit sharing. If the DC plan does have a last day condition, then you will probably need to do an -11(g) corrective amendment to waive the last day condition for those employee(s) entitled to the top heavy minimum.

22 minutes ago, C. B. Zeller said:

Sometimes you have to read between the lines, but the answer will be there somewhere. Start with the DB plan - it has to say somewhere to which plan the top heavy contributions will be made. If it says to the DB plan then you are stuck with the 2% accrual.

If it says to the DC plan, then you have to go and look at what the DC plan says. If the DC plan allows for top heavy minimum contributions to be made on behalf of the employer's DB plan, then go ahead and make the 5% to the DC plan.

If the DC plan doesn't acknowledge the DB plan for top heavy minimums, but it doesn't have a last day allocation condition for profit sharing, then you can still make the 5% to the DC plan, just call if profit sharing. If the DC plan does have a last day condition, then you will probably need to do an -11(g) corrective amendment to waive the last day condition for those employee(s) entitled to the top heavy minimum.

Thanks for your comments.  We have essentially done what you suggest.  Sometimes "reading between the lines" can give differing ideas.  We then just march along with our best guess, discuss with the plan administrator, and make sure they understand the issues and they agree.

Thanks again to you and Lou for your comments.

That's what I was going for, Zeller just spelled it out much better than I did.