combined 401(k)/cross tested

[Belgarath]

I'm suffering from brain cramp today, and my brains have turned to sand and are running out my ear every time I tilt my head.

Is the Gateway minimum calculated on the cross tested plan alone or does it include the 401(k) contributions?

Example: Highly Compensated employees receive 20% of pay between both plans, but only receive 9% in the cross tested. Is the Gateway minimum 5% or 3%? I think that under 410(B) these are not aggregated, and it is the 3%. Would appreciate any opinions! Thanks.

[AndyH]

It's only the employer, so the answer is 3%.

[Tom Poje]

Section B of the Explanation of the regs (2nd paragraph)

...elective contributions and matching contributions would not be taken into account for purposes of the gateway....if an employer also provides a 401(k) plan, however, then to the extent the HCEs are electing contributions under the plan, the highest HCE allocation rate may be lower than it itherwise would be...

at least you have or had a brain that could turn to sand!

[Belgarath]

Thank you for your replies. Going into a bit more detail, consider the following:

Reg. § 1.410(B)-7©(1) says that the portion of a "plan" that is a "section 401(k) plan" and the portion of the plan that is not a "section 401(k) plan" are treated as separate plans for purposes of 410(B).

Reg. § 1.410(B)-9 defines a "section 401(k) plan." As I read it, it says that for this purpose, a "section 401(k) plan" consists only of elective contributions described in reg. § 1.401(k)-1(g)(3) and does not include qualified nonelective or qualified matching contributions treated as elective deferrals under reg. § 1.401(k)-1(B)(5).

If this reading is correct, then anything other than an elective deferral or a matching contribution would be tossed into the bucket subject to 401(a)(4) testing. So discretionary contributions would be lumped with any forfeitures, booster and fixed contributions for this purpose.

So I guess all of these amounts would also go into gateway testing. In the example originally given in this post, if the 11% to the H/C under the 401(k) included a 2% forfeiture, for instance, then the Gateway minimum would be 3.67%. And it's worth noting that the 1/3 test uses PLAN compensation, which could contain exclusions, but the 5% Gateway test uses TOTAL compensation. Yuck! Do you agree with these conclusions, or have other opinions?

[Tom Poje]

its even worse than you describe:

1/3 of plan def of comp (which could exclude some comp)

5% of 415 comp, but this can be from entry date

3% top heavy on total comp. for the year.

I tried to write up an example for the nondiscrim answer book that way. maybe some day I will have time to put some more effort into that book. time will run out on me, with the incoming work I have.

I think QNECs, since used in the ADP test, end up getting treated as if they are deferrals. certainly the software I currently use doesn't use them in the a(4) test.

This is different than the safe harbor nonelectives which perform all other types of duties, and are truly multi-purpose.

That is why I don't like people referring to the safe harbor contributions as QNECs. the SHNECs can be used in a(4) though no fair imputing.

[AndyH]

Plan comp can be used for the 3/1 gateway only if it satisfies 414(s). I see plans that use comp that doesn't satisfy 414(s) but they're tested on 414(s) for 401(a)(4) and ADP, so the gateway issue is another thing to watch for in such cases.

Also, I think that a plan that has a QNEC must be tested both with and without the QNEC, but if it goes only to non-HCEs, then the only test that matters is with QNECs out since the other would be better.

Also, I think employee aftertax is out, and aren't ESOP additions out as well?

[Belgarath]

Hi Tom - your comment about the QNEC's concerned me, so the following is my reading of the regs, and subsequent interpretation. I'd appreciate it if you could take a look, and give me your reason(s) why (or if) you disagree. This issue is going to be important to a lot of folks who do cross tested plans. Thanks!

Note that I paraphrase and condense a bit in the interests of brevity.

1.410(B)-9 defines a section 401(k) plan, and excludes the "portion" of a plan that consists of "...QNEC's treated as elective contributions under 1.401(k)-1(B)(5)."

If I go to that section 1.401(k)-1(B)(5), and (5)(i), it says that QNEC's may be taken into account under the ADP test, provided it satisfies 401(a)(4). See 1.401(a)(4)-1(B)(2).

Strolling right along to this reg, if I can even manage to type the reference correctly, 1.401(a)(4)-1(B)(2)(ii)(B), as I read it, says that the QNEC's are not subject to the special rule in this paragraph because they are not treated as part of a section 401(k) plan as that term is defined in 1.410(B)(9). And that the QNEC's must satisfy paragraph (B)(2)(ii)(A) of this section, which means they ARE subject to 401(a)(4). And therefore would be thrown in to the bucket subject to Gateway testing.

All other interpretations are welcome!

[AndyH]

From The ERISA Outline Book (1998 version in front of me) Page 9.16

"In fact, the plan must be able to satisfy 401(a)(4) when QNCs are combined with other nonelective contributions, and also when the other nonelective contributions are tested separately from the QNCs. See Treas. Reg. 1.401(a)(4)-1(B)(2), 1.401(k)-1(B)(5) and 1.401(m)-1(B)(5)"

I just happened to research this the other day.

[Tom Poje]

Belgarath, you are correct, as Andy indicated it is a yes and no deal.

QNECs normally only go to NHCEs, so if you pass testing w/o them, you would have to pass testing using them.

I think it was Mr. Starr (not Kenneth) who said if you use a standardized plan, you get what you deserve. QNECs go to all in a standardized plan.