Aggregating a Safe Harbor and a Non-Safe Harbor

[austin3515]

Got a company with one plan.

Is it possible to set up two separate plans with all HCE's and some NHCE's in one plan, as a safe harbor plan using the 4%Match, and all other NHCE's in another plan that is a straight 401(k) plan (distinctions made by production/nonproduction personnel).

I'm assuming the only way to pass coverage is to aggregate the Plans because al HCE's are in one plan. But then because you aggregate for coverage, you must aggregate the Plans for ADP/ACP testing? But then one Plan is a Safe Harbor and exempt from ADP/ACP.

Also, since there are no profit sharing contributions in either plan, I'm assuming I don't have any issues with 401(a)4. Is that right?

My real question is "does the need to aggregate a safe harbor and a non-safe harbor plan to pass coverage blow the safe harbor all together?"

[Mike Preston]

Yes.

[Tom Poje]

short on words, huh Mike? You should write the regs next time. Ha.

I suppose if the safe harbor 401(k) plan covered at least 70% of the NHCEs you would not have to worry because you would pass testing without aggregating the plans.

Of course if I was in the other plan and could take a job elsewhere I would probably would.

[MWeddell]

To preserve the safe harbor, the plan with the HCEs would have to pass coverage testing separately. Hence, the plan with the HCEs would have to pass the average benefit test or the ratio percentage test.

[Mike Preston]

Not often, Tom.

[FJR]

If this plan let people in with less than a year, can you also segregate the < than a year of service from the ones with a year for coverage purposes?

Tom, did you mean 70% of NHCE is one plan or both?

[Tom Poje]

FJR:

lets say I have 2 plans

plan 1 has 7 NHCEs and 5HCEs

and plan 2 has 3 NHCEs

so for rati % testing you have

plan 1 7/10 / 3/3 = 70%

plan 2 3/10 / 0/3 = no hces so passes

(If I understand you correctly)

[austin3515]

Plan 1 has 7 NHCE's and 5HCE's benefitting

Plan 2 has 4 NHCE's and no HCE's

Plan 1 coverage = 7/11 = 64% divided by 100% (5/5) = ratio percent of 64% - failing.

The plan I was talking about is significantly more distorted than that (probably 25 or 30 people in Plan 1, and a couple hundred in Plan 2), so my only option is ABT, right?

And f I can't pass the nondiscriminatory classification test without aggregating the Plans, the Plans are no longer effective, right?

Also, these Plans have extremely low ADP/ACP test results and no employer profit sharing contribution. The owners always put in too much. Is the ABT test run before or after the ADP/ACP corrections? I hope after!

Thanks for all the information so far!

[FJR]

I know I am confusing myself, but for coverage aren't you segregating the componants of the plans. For the 401(k) portion, if everyone who is eligible to defer than how can you fail coverage. Same goes for the match?

[austin3515]

That's true, except the results for both the 401(k) and the match should be exactly the same. So there's techincail 4 tests in total. Coverage for match and 401(k) in Plan 1, and the same tests in Plan 2.

I'm concerned that Plan 1 woon't pass coverage...

[Tom Poje]

based on what you say, I would agree, plan 1 will not pass coverage.

FJR

The issue boils down to whether you aggregate the plans. It is not simply a matter of 'everyone can defer' so I must pass coverage.

If the plans are not aggregated, then not everyone can defer

(e.g. the ees in plan 2 can't defer in plan 1)

[FJR]

I agree, but don't you have the choice of aggregating or not aggregating for coverage. Also, you don't want to overlook anything. We had a situation where an administrator didn't take out othewise excludeble employees, as they let people in after 6 months. In that case you would probably help the situation on passing.

[austin3515]

When you aggregate for coverage you need to aggregate for all non-discrim. testing. The original intention was to have one safe harbor plan and one non-safe harbor plan. Therefore, aggregating for coverage ruins my evil plan!

As for otherwise excludables, we are aware of these rules. I didn't mention for simplicity's sake.