|
Cross-Tested Plan Contribution Caveats Under certain circumstances, a gateway minimum contribution may need to be provided to participants in the year of their termination or to other employees who otherwise would not have been entitled to a cross-tested contribution in order for a plan to remain eligible for cross-testing. Top-Heavy Contribution Cross-Tested Plan In a cross-tested plan that becomes top heavy, the top-heavy contribution must be provided to all eligible participants who are employed on the last day of the plan year. For participants who would not have received any nonelective contribution because they were not eligible, this top-heavy 3% contribution will bring that participant into the gateway contribution testing requirements. For example, if a participant was not eligible for a cross-tested allocation because he or she did not work 1,000 hours, but was employed on the last day of the plan year and, thus, received a top-heavy contribution, then this participant in a 5% gateway plan would have to be given an additional 2% contribution to satisfy the 5% cross-testing gateway. Failure to do so would render the plan ineligible for cross-testing. Safe-Harbor 401(k) Contribution Cross-Tested Plan A similar situation arises in a safe-harbor 401(k) cross-tested plan. For example, if a participant leaves before the end of the plan year, he or she is not eligible for the cross-tested allocation; however, the participant must be given a safe-harbor 401(k) 3% nonelective contribution. Assuming the plan uses the 5% gateway, the participant must receive an additional 2% contribution to satisfy the gateway. This is because the minimum gateway allocation must be made to any nonhighly compensated employee who has received any allocation of employer contributions. Keep in mind that if the 3 times gateway design is used, the minimum gateway contribution will still have to be met. However, a 3% top-heavy or safe-harbor 3% NEC may be sufficient to meet the gateway if the allocation to HCEs does not exceed 9%. What if the plan uses the otherwise excludable employee coverage testing method and permits employees to defer immediately but requires them to satisfy one year of service and age 21 to be eligible for the cross-tested and gateway contributions? If a plan benefits employees who have not met the minimum age and service requirements of section 410(a)(1), the plan may be treated as two separate plans, one for those otherwise excludable employees and one for the other employees benefiting under the plan. Thus, if the plan is treated as two separate plans in this manner, cross-testing the portion of the plan benefiting the nonexcludable employees will not result in minimum required allocations under the gateway for the employees who have not met the section 410(a)(1) minimum age and service requirements. What if such a plan is top-heavy and the participants are eligible to defer and thus receive a top-heavy contribution? The answer would be the same in that if the plan is tested using the otherwise excludable employee method, there would be no gateway contribution required for those who have not satified one year of service and age 21.
To learn more, call 973-492-1880 or e-mail info@mhco.com. © 2012, McKay Hochman Co., Inc. All rights reserved. |
|