Controlled Group/ Cross-Testing

[IRC401]

Client sponsors two plans, A and B. (Assume: (1) no other plans in the controlled group, (2) none of the plans is top-heavy, and (3) broadly available allocation rates will not work.)

Each plan provides for 401(k), match, and profit-sharing.

Each plan passes all of its 410(B) 70% coverage tests separately.

(a)(4) Testing: Client wants to test the profit-sharing contribution for Plan A, but not for Plan B, on a benefits basis. The profit-sharing allocation for Plan A passes the "minimum allocation gateway" test. The profit-sharing allocation for Plan B complies with 401(a)(4) tested on an allocations (not benefits) basis. It would not pass the "minimum allocation gateway" test if Plans A and B were tested together.

Issue : When I run the average benefits percentage test (for purposes of my 401(a)(4) testing) for Plan A do I test on a benefits basis or an allocations basis? [if I test on a benefits basis, then the 401(k) contributions made by young non-HCEs who are not in a plan that passes the minimum gateway allocation test will make it easy for Plan A to pass the average benefits percentage test.]

Do I use a benefits basis for testing Plan A and an allocations basis for testing Plan B?

[AndyH]

You can do as you suggest, or the reverse if you wanted to. You just need to do it the same way for all allocations in each test. So, both tests could be done on allocations or benefits basis, or one could be done one way and the other the other way.

You are right about the impact of deferrals. They can have a huge effect, and often times the result makes little sense.