Can Plans Be Tested Separately?

[metsfan026]

I just wanted to make sure this company was given good advice (not currently our client).

They currently have a 401(k) Plan and are looking to add a Cash Balance on top of that.  I don't believe there are currently any employer contributions going into the 401(k) Plan.  In that situation, do the Plans have to be tested together or can the Plans be separated and tested individually?  So when we are collecting EBAR for Rate Group testing, etc., can the 401(k) contributions going into the other plan be ignored?

Hopefully this question makes sense.  Thanks!

[Bri]

It will depend on the allocation formulas in the cash balance plan.  If they're a "safe harbor" methodology (as opposed to different groups getting different amounts) in each plan then a straightforward 410(b) test should suffice.  

Of course they might WANT separate CB formulas, which could then lead to preferring to making employer contributions to the 401(k) after all.

 

[C. B. Zeller]

Yes. Combined plan testing is done under the "permissive aggregation" rules which allow plans to be tested together under certain circumstances if they would not otherwise pass testing. If the plans pass coverage and nondiscrimination on their own, they do not have to be tested together. If you aggregate for coverage or nondiscrimination, though, you have to aggregate for both.

This is different from top heavy, which has a "required aggregation group" that includes all plans which cover a key employee. So it would be possible for the two plans to be tested separately for coverage and nondiscrimination but still be part of the same top heavy aggregation group.

[CuseFan]

Agree with the above, but sometimes there are situations when you have to aggregate plans to satisfy coverage and nondiscrimination. For example, an anesthesiology practice with primarily owners, maybe some other HCEs and a few administrative NHCEs. The CBP may cover just the owners because they make up more than 40% of the headcount and exclude everyone else. Thus the CBP would fail coverage and have to be aggregated with PS and likely SH portion of the 401(k) plan to satisfy coverage.

[My Three Sons]

According to the initial thread, the 401 Plan is deferral only (no employer contribution). If so, doesn't that mean that for Rate Group purposes, these deferral contributions must be ignored? If the Cash Balance Plan is tested on a DB for AB% purposes (rate groups above mid-point), and there are employer contributions, doesn't the deferrals have to be included in this test?