American Administration Services Company
Cross-Tested Retirement Plan Contribution Issues
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.
NOTE: 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%
The Final IRS Regulations (TD 8954) that allow defined contribution and combined defined contribution/defined benefit retirement plans to satisfy nondiscrimination requirements based on plan benefits, rather than contributions.
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