Cross-testing the 401k Plan

[Fred Payne]

In the ERISA OUtline Book, Tripodi says, "to pass 401(a)(4), every rate group must statisfy the coverage requirements of 410(B). Both the ratio test and the average benefits test are available for this purpose."

But what if there's a Safe Harbor 401k Plan involved? The ratio test and the nondiscriminatory classification tests do not include salary deferrals or the 3% SHNEC. I've calculated scenarios for 401k safe harbor cross-tested plans in which each rate group passes both the ratio test and the nondiscrimantory classification test but the Plan overall fails the average benefits test with a ratio under 70%.

Has such a plan passed?

[Tom Poje]

careful Fred.

The average benefits % includes all contributions - (well I guess not post tax). You are also allowed to impute on the nonelective (but not the SHNEC)

when testing ratio percentage for coverage (even if there was an additional profit sharing piece) I would expect you to have 100% since you can't have an hours requirement or last day provision.

for the cross tested portion you would have (to make the example simple I will test on an allocation basis.

deferrals and match, if they exist have no bearing at this point.

ee 1 shnec = 3% profit sharing = 4%

when imputing you get to use the lesser of 2* or 5.7

so ee 1 would have

3% + 4% + 4%(imputed) = 11%

ee2 shnec 3% profit sharing = 10%

so

3% + 10% + 5.7% = 18.7%

[Fred Payne]

Tom:

I think I'm calculating EBARs correctly, even when there are some parts that cannot benefit from disparity. My question speaks to another issue entirely. (Or I just didn;t understand your response.)

If I had a strictly profit sharing plan AND each rate group passed the Ratio Test, my understanding--from the ERISA Outline Book site--is that I need not even conduct the Average Benefits Test.

But what if I have a 401k component? Eventhough the ratio test does not include salary deferrals, match or 3% SHNEC, can I still ignore the Average Benefits Test if, one, the 401k is Safe Harbor, and two, each rate group passes the ratio test?

If I have a Safe Harbor 401k Plan for which there is no Employer contribution other than the 3% SHNEC, giving the 3% SHNEC to all eligible participants insures passing coverage.

I'm finding that I can have a cross-tested 401k Plan where I pass the Ratio Test but fail the Average Benefits Test even though I use a 3% SHNEC. Do I need to increase the Profit Sharing contribution until I can pass the Average Benefits Test even though this additional contribution is not needed for the ratio test or the nondiscriminatory classification test?

[Tom Poje]

if each rate group passes you do not have to use the average benefits % test.

If all you had was a SHNEC, then ratio % would be 100% for coverage. you have a uniform formula for all employees (same % to everyone) and so you wouldn't have a reason to cross test.

remember, the only time you need to cross test is if you have a non safe formula. In fact, if you were to actually test a safe harbor formula using the accrual method you could end up failing the test - but you aren't suppose to do that. (I have seen people do it and ask what they are suppose to do at that point!)

You are correct, having a 401(k) component has no effect if each rate group passes ratio %. I myself have never run a cross tested plan in which each rate group passes ratio %. It is almost impossible since the purpose of a cross tested plan is to heavily favor the hces.

[AndyH]

Tom, just to enhance the discussion, I often see non-profit "cross-tested" plans pass the ratio percentage test for each rate group.

These usually have allocations based upon service or some "non-uniform" points system. They might not be your protopypical "cross tested" plan, but they often must be general tested, and often do not pass on a contributions basis, so they must be tested a benefits basis.

For whatever reason, non-profits seem to have HCEs with short service, so allocations based upon service often pass cross testing easily.

This also might occur when an HCE terminates in a plan with a last day provision.