Testing a controlled group with a Safe Harbor and non-Safe Harbor 4k P

[Guest Joe Vasko]

I have a client who currently sponsors a 4K Safe Harbor Plan for his employees. He recently bought another company, for which he owns a 100%, and would like to set-up a seperate 401(k) Plan for those employees.

I know for testing purposes, both company's will be combined as one employer. However, how would you handle the ADP test since one plan is a 4k Safe Harbor?

[jaemmons]

As long as each company satisfies coverage on its own before the merger, I would use the transition rule under IRC 410(B)(6), which would allow you to disaggregate the two companies for most plan purposes until "the last day of the 1st plan year following" the date the merger took place. This would allow you to keep the safe harbor plan only for the one company and test for ADP compliance in the other company during the "transitional" period.

However, after the period has expired, you must then test to see if you can keep two plans (i.e.-coverage requirements for benefits, rights, and features). If you satisfy this test, you can still keep separate plans, but if not, you will need to merge them together. However, regardless of whether you keep two plans or one, for top heavy purposes, unless both plans are safe harbored and have no other ER $'s going in, you will need to mandatorily aggregate them for TH determination purposes.

I am glossing over what I believe to be the important issues but if you want more detail let me know.

[Guest Joe Vasko]

JAEMMONS,

I appreciate your reply, but have one more question that I thought of after I posted my question. Can one plan have 4k safe harbor provisions (ie. 3%) and the other 4k plan not have 4k safe harbor provisions. Would this violate the benefits, rights and features since they would be considered a controlled group with different plan provisions?

Thanks,

Joe

[jaemmons]

No it wouldn't. Keep in mind that although they are considered "one" employer under IRC 414(B), they can be disaggregated during the transition period, as defined in IRC 410(B)(6)©(ii) and tested as individual plans covering only their respective employees. By disaggregating the two companies and setting up two plans, each covering their respective ee's, you will not violate coverage for any BRorF, as long as each plan satisfies coverage on its own. Therefore, one plan can be safeharbored while the other is not.

However, as I previously stated, you will need to make a decision with your client after the transition period as to whether or not the plans can stand on their own, based upon coverage issues.

Another question...Are both companies in the same industry? If not, you may want to look at testing for a QSLOB under IRC 414®. If they can qualify as separate lines of businesses, they generally don't have to be considered one employer for coverage and nondiscrim testing purposes and you can keep one safe harbor plan and one "regular" 401k. Just something else to think about...

[Guest Joe Vasko]

Again, thank you for your reply. There is no transition period to consider. The company already has a 4k Safe Harbor Plan, and the company they purchased currently does not have a qualified retirement plan (same line of business). In this case, am I safe to assume that both have to be 4k Safe Harbor Plans?

Thanks,

Joe

[jaemmons]

No, both plans do not have to be safeharbored. The business being acquired does not need to maintain a plan prior to the merger, in order to apply the aforementioned coverage rules for retirement benefits. However, you can test for coverage to see that at least 70% of your NHCE work force is receiving comparable benefits between both plans OR you can just setup the new plan to be a safe harbor 401k. The latter of the two may be easier, but I just wanted to give you another alternative.