401(k) plans with different plan years? Why? How would ADP test be do

[John A]

Does anyone know of a plan sponsor that maintains 2 separate 401(k) plans that have different plan years? Why would an employer do this? How is ADP testing done? If the two 401(k) plans normally had no employees in common, but some of the participants from one of the plans had to be added to the other in order to pass 410(B) coverage requirements, would the ADP test be done using all participants from both plans, or could the ADP tests be done separately for each plan, aggregating the ADP for only the participants who deferred (or were eligible to defer) to both plans?

[Tom Poje]

Danger Danger Danger Dr. Smith.

Under 1.410(B)-7(d)(5) Two or more plans may not be aggregated and treated as a single plan under permissive aggregation unless they have the same plan year.

Do not pass go. do not collect $200.

Note: this rule does not apply to the average benefits percentage test.

[John A]

Tom, what are the following rules for (when do they apply)?

1.401(k)-1(g)

(3) Treatment of plans with different plan years. If the cash or deferred arrangements that are treated as a single arrangement under this paragraph (g)(1)(ii)(B) are parts of plans that have different plan years, the cash or deferred arrangements are treated as a single arrangement with respect to the plan years ending with or within the same calendar year.

1.401(m)-1(f)(1)(ii)(B)

Highly compensated employee eligible under more than one plan. The actual contribution ratio of a highly compensated employee who is eligible to participate in more than one plan of an employer to which employee or matching contributions are made is calculated by treating all the plans in which the employee is eligible to participate as one plan. However, plans that are not permitted to be aggregated under §1.410(B)-7©, as modified in §1.401(k)-1(g)(11), are not aggregated for this purpose. For example, if a highly compensated employee with compensation of $80,000 may receive matching contributions under two plans of an employer, the employee's actual contribution ratio under each plan is calculated by dividing the employee's total matching contributions under both plans by $80,000, unless the plans are required to be disaggregated. In that case, the actual contribution ratio of the employee under each plan is to be calculated by dividing the employee's matching contributions under that plan by $80,000. See paragraph (B)(3) of this section for the treatment of certain multiple plans. For plan years beginning after December 31, 1988, or such later date provided in paragraph (g) of this section, if a highly compensated employee participates in two or more plans that have different plan years, this paragraph (f)(1)(ii) is applied by treating all plans whose plan years end with or within the same calendar year as a single plan.

[Tom Poje]

Big John: (or is it Little John, from Sherwood Forest)

Or maybe I should say if it wasn't for the statement, maybe I would never figure it out anyway. I have never seen 2 401(k) plans with different plan years, so this would be something new to me.

410(B) says we can't aggregate the plans for coverage (except for the average benefits percentage test) Ah, actually I think I get it. The average benefits percentage test, is, an amounts test, so it is like its own ADP test - if all you would consider were deferrals. Now, when performing the average benefits percentage test under this condition, you include all contributions for plan years ending in the same calendar year. 1.410(B)-5(d)(3)(ii) and (d)(5)(ii)

1.401(m)-1(f)(1)(ii)(B) or 1.401(k)-1(g)(1)(ii)(B) say the same thing - if there are more than one plan you combine the numbers.

the ERISA Outline book then describes the 401(k) test as follows:

"This rule (1.401(k)-1(g)) applies even if the plans are not permissively aggregated for nondicrimination purposes."

So it is obvious we must aggregate 401(k) even if we can't for 410(B).

But actually you sort of aggregate for 410(B), but only for the avg ben % test.

1.401(k)-1(g)(3) simply restates what 410(B) said for the avg ben pct test - how you handle plans with different plan years