No allocation to HCE

If in a New Comparability plan where each participant is in their own allocation group, is it permissible to provide an HCE with no allocation?

I don't see an issue. I actually have a plan where one of the owners does not want a contribution. It's a new comp plan.  The tests are all to make sure the plan doesn't discriminate against non-HCEs, not HCEs so I think you are fine.

If the Plan is top heavy and he's not a key, he'll need a top-heavy minimum but otherwise you are allowed to discriminate against HCEs all you want. So if he's in his own group allocate $0 to his group.

Under what regulation allows this to happen? I understand that the same is true for NHCEs if there are no HCEs in the plan that you can give it to a select few.

The client in this case is concerned that eligible participants that did not receive an allocation can possibly seek legal action, so they want to confirm that this is legitimate.

Under the terms of the plan document.

A friendly reminder that the IRS considers the combination of "everybody in their own group" and "1 or more participants, whether HCE or not, receiving $0 for the year" invokes the prohibition on using the Average Benefits Test to satisfy coverage.  While not typically a problem, if the plan also carves out for eligibility it could become an issue. FWIW

The plan document is governed by IRS regulations which are incorporated within. I am trying to pinpoint a Treasury or IRS reg which allows this.

The cross testing / new comparability regs are in 1.401(a)(4)-8.

I have reviewed the regs and have not come across any language that insinuates that a $0.00 allocation to one HCE in his own group is allowed if the rest in each of their own groups are receiving an allocation. 

I have read previous message boards with the same topic, but nothing substantial to back up how it is okay to do this. 

If there is anyone aware of the permissibility of this, please help!

A cross tested plan could be a cold shoulder to some participants.

The cross tested plan allows for disparity in the allocation the profit sharing.  The disparity could be 0.00 to an HCE.  There is a wide variety of outcomes in a CT plan.

If the client is so nervous about the allocation, give the HCE $100 and be done with it.

The testing is going to be the same process if the HCE gets 0 or 100.

11 minutes ago, Logan401 said:

I have reviewed the regs and have not come across any language that insinuates that a $0.00 allocation to one HCE in his own group is allowed if the rest in each of their own groups are receiving an allocation. 

I have read previous message boards with the same topic, but nothing substantial to back up how it is okay to do this. 

If there is anyone aware of the permissibility of this, please help!

It is a problem only if you have to use average benefits tests to pass. 

 § 1.410(b)-4.  

Quote

(b)Reasonable classification established by the employer. A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under theplan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification.

The IRS considers criteria having the same effect as exclusion by name to NOT be a reasonable classification.

Can you pass without ABT?  Then no problem.

If the HCE in question controlled or had substantial influence over the decision concerning his/her allocation (or, in this case, nonallocation), then the plan may contain a nonqualified CODA that could disqualify it. See Treas. reg. 1.401(k)-1(a)(3) and related guidance.

It would pass after restructuring, so the ABT would not be necessary. I am more concerned that we all know that the rules allow for this, however, the exact reg. concerning this type of disparity is not discernable when reading  1.401(a)(4)-8 . How are we assuming this without verifiable proof? (I'm playing devil's advocate if you haven't guessed!) 

Show me where it is not allowed.  Or, at the least, something that indicates it may not be allowed.  Sheesh, time to find some real work, huh?

I am guessing we can assess that fact that it is not required based on the General Rule?:

(B) For plan years beginning on or after January 1, 2002, the plan satisfies one of the following conditions -

(1) The plan has broadly available allocation rates (within the meaning of paragraph (b)(1)(iii) of this section) for the plan year;

(2) The plan has age-based allocation rates that are based on either a gradual age or service schedule (within the meaning of paragraph (b)(1)(iv) of this section) or a uniform target benefit allocation (within the meaning of paragraph (b)(1)(v) of this section) for the plan year; or

(3) The plan satisfies the minimum allocation gateway of paragraph (b)(1)(vi) of this section for the plan year.

So, under (3), since an HCE is not required to receive the minimum gateway, he is allowed to receive $0.00. 

Luke, have you ever seen that applied? IRL?  I haven't.

Mike, not by the IRS, but I think in part that's because the rule is generally enough known that the plans that would be targeted by IRS for audit on the issue (e.g., plans of larger professional firms) apply the rule conservatively themselves, although as in most things there are gray areas.

I have seen some pretty aggressive stuff in the wild. Never seen the IRS even raise the issue.

4 hours ago, Mike Preston said:

Show me where it is not allowed.  Or, at the least, something that indicates it may not be allowed.  Sheesh, time to find some real work, huh?

I am with MIke here isn't the question backwards?  As a general rule aren't plans allowed to have any allocation method that can follow the rules and pass the tests?  If so, you don't have to find a rule/test that says it is allowed you have to find a rule that says it isn't allowed. 

If you can't find a rule that says it isn't allowed go for it.  I think there are some interesting questions that might say it isn't allowed- is a CODA for example is interesting. 

15 hours ago, Logan401 said:

So, under (3), since an HCE is not required to receive the minimum gateway, he is allowed to receive $0.00. 

Where does it say that an HCE is not required to get a Gateway?

48 minutes ago, BG5150 said:

Where does it say that an HCE is not required to get a Gateway?

Treas. Regs. 1.401(a)(4)-8(b)(1)(vi)

1 hour ago, BG5150 said:

Where does it say that an HCE is not required to get a Gateway?

49 minutes ago, Logan401 said:

Treas. Regs. 1.401(a)(4)-8(b)(1)(vi)

duh.  never mind.  i need more caffeine this morning...