Cross tested w/ 401(k) & match

[R. Butler]

Getting ready to do my first "real world" experience with a Cross Tested Plan w/ 401(k) & Matching Provisions. Just want to verify a few things:

1. Profit Sharing Contribs and forfeitures are the only contribs used in rate group testing.

2. 401(k) and matching only used in the Average Benefit Portion.

3. If my coverage ratios in the rate group testing ratios exceed 70%, I don't worry about the Average Benefit Portion.

Does this sound right?

[Tom Poje]

yes, with clarifications. I don't like the term average benefits portion because the average benefits test consists of both the Avg Ben % test and the nondisrim classification test. you run the risk of confusing the terms.

2. average benefits % test includes all contributions of 401(k), m and the profit sharing and forfeitures.

when determining the Nonhighly Concentration Percentage (if you get to that point) is based on only those ees includable in the profit sharing portion, at least that is my understanding. I heard otherwise at the ASPA conference, but disagree with the speaker. (e.g. a person might be eligible to defer and quits with less than 500 hours. he is included in the avg ben % test, but is excludable from the profit sharing portion, and therefore not included in the NHCE concentration determination)

[R. Butler]

Now an age-weighted plan avoids the gateway. Can I add the 401(k) to an age weighted profit sharing plan and still avoid the gateway?

[AndyH]

R. Butler, yes, absolutely. Deferrals are not an issue for the gateway.

Tom, do you recall who said that about the concentration percentage? I remember somebody saying that there is only one, and I think implying that it was based upon the ABPT includables, but I'd like to get some clarification of that issue as well.

[Tom Poje]

I don't recall who said it...Carol...???.

I am going by what Larry Deautsch said a few years ago.

the nondiscrimination classification test is found in 1.410(B)-4 - that is where the safe harbor/unsafe harbor table is discussed, etc.

the average benefits % test is not found until 1.410(B) -5

but see also example 2 in 1.410(B)-6. it discusses 3 plans with different eligibility requirements. think of the three plans as being 401k, 401m and profit sharing. if you only look at the profit sharing, you can only conclude that the concentration test includes just the plan you are looking at.

or consider an example with a profit sharing with 1 hce and 3 nhce, so you have a concentration % of 75%, which results in that deadly midpoint of 33.75. consider that only 1 nhce has an e-bar greater than the hce, so you fail testing.

But if you included all eligible to defer (lets say there are more NHCEs) then you have increased your concentration %, and therefore you now pass. That makes little sense.

The only test that includes everyone is the average benefits % test. But remember, the average benefits test consists of that test and the nondiscrim classification test. logically, why would you include everyone for part of the classification test (the concentration % portion) but then only include those includable for that portion of the plan when doing the rate groups?

[AndyH]

Tom, I just stumbled on my notes about the Concentration Percentage calculation. And it was from Carol's session. She said to include any person eligible for any plan sponsored by the employer or any member of the controlled group, so that would be a much wider group than those in the rate group test.

She did worshops 28 and 31. I'm not sure which one I was in. I think it was 28.

[Blinky the 3-eyed Fish]

Page 8.201 of the ERISA Outline Book says to use both plans' nonexcludables only if they are permissively aggregated.

[AndyH]

Blinky, I'm not sure it says that, at least not on that page of the 2001 edition. If you're using that edition, it says, "To determine the NHC concentration percentage, divide the number of NHCs by the number of all employees........"

It says nothing about participants.

Then it says "disregard employees ..... who are excludable under 1.410(B)-6", which I think means excludable under the ABPT.

And the Nonhighly Compensated Employee Concentration Percentage is defined in 1.410(B)(4)©(4)(iii) as "the percentage of all the employees of the employer who are nonhighly compensated employees. Employees who are excludable employees for purposes of the average benefit test are not taken into account."

I don't think this supports counting only people in the rate group test.

[Tom Poje]

Andy,

I would still disagree with Carol.

the only place all plans are aggregated is the average ben % test.

but the concentration percentage is used when seeing if a

'plans' ratio percentage is greater than the safe harbor...and the ratio percentage is done only on the 401k or 401m or nonelective - on a nonaggregated basis.

The example of the ERISA Outline Book(2001 edition) on 8.50 does a walk through of the ratio % that fails, and see how the concentraion percent is calculated. There is nothing in the example that hints or even implies that 'you might have to add back those bodies that terminated with less than 500 hours if the plan included a 401k portion when determining you concentration %."

And Sal's pretty good about pointing things like that out.

or, this is the way Larry Deutsch described it years ago (of course he could have changed his mind since then)

There are two plans involved. The first plan is defined in 1.410(B)-7(a) This plan is used for all purposes except determining the average benefits percentage . This would include determining the concentration percentage and the mid-point. For your purposes this is the profit sharing plan only.

The second plan is defined in 1.410(B)-7(e). this plan is used only for purposes of determining the Average Benefits Percentage. For your purpose this is the aggregation of the profit sharing and the 401(k).

These two plans have different eligibility, and so a different set of excludable and non excludable employees. This point is illustrated in the combination of examples 2 and 3 in 1.410(B)-6(B)(4). in example 2 the eligibility of only the plan (or aggregated plan) is used for determination under ratio percentage test or nondiscrimanatory classification test (which includes the concentration percentage). In example 3 the lowest eligibility of any plan is used for determining the Average Benefit Percentage.

[AndyH]

oops. My edition is 2002 (copyright 2001), so that probably explains why I didn't see Blinky's language, nor have I found yours, Tom, yet.

[Guest DFerrare]

Andy

Look at page 8.59 of the 2002 edition, under "2. Average benefits test". It says "The nondiscriminatory classification test is performed separately for each disaggregated plan, based on the coverage testing group and the benefiting group identified for that plan."

David

[AndyH]

Right on point, David. Thank you.

I do wish he had a cite or footnote, but it could not be more on point.

[Guest DFerrare]

Well, 1.410(B)-2(B)(3) says that -4 and -5 must be satisfied to pass the average benefit test.

-7©(1) provides for the mandatory disaggregation of the (k) and (m) components for purposes of 410(B)

-7(e) says to apply -5 without regard to -7©(1)

So -4 has to be applied on a disaggregated basis.

[Tom Poje]

good discussion, points out the importance of specifying which edition of a book you are using!

I will have to see if I can get this one added to the Coverage Answer Book!