Cross Testing a Controlled Group

[dmb]

A client is 100% owner of two companies. Company A, he is only HCE and has about 20 other employees. Company B, there is an additional HCE and about 20 other employees (not same employees as company A). Company A is not very profitable and he would only like to contribute 3% TH min. Company B is profitable and he would like to max out himself while somewhat minimizing employees. Is there a way to set up a plan for each company and accomplish this?? Is there a way to set up new comparability plans and avoid giving 5% to employees of company A?? Thanks.

[Mike Preston]

If I understand this, the owner is an employee of both A and B. There are 2 HCE's in total. There are about 40 NHCE's in total. You want to establish a 3% contribution for about 20 of these employees. Further, you want to establish a new comparability plan, which implies a 5% minimum contribution, only for the other 20 NHCE's.

As long as the plan for Company B satisfies 410(B) without considering the plan of Company A and the rate group testing under the plan for Company B is performed assuming the individuals in Company A are not benefitting, I think that the individuals in Company A would not need to satisfy the gateway.

Maybe I'm not understanding the situation, though.

Anybody disagree?

Note that the Average Benefit Test will still count the Company A contributions.

[dmb]

You understand the situation correctly, and company B does pass 410b without considering company A. Are you saying that two New Comp plans can be set up, one for each company and company A can give employees 3% of comp regardless of the company B plan??

[AndyH]

yes, agree. But, DMB, as Mike said you must separately satisfy coverage for each plan.

[dmb]

Ok, but when you say coverage and Mike says 410b, you're not just talking about the 70% overall test. You mean 70% for each rate group or passing the midpoint test, correct.

[AndyH]

Mike and I are saying the same thing.

Note, however, that there is no midpoint test in the average benefits percentage test. That is 401(a)(4), not 410(B). You need to pass 410(B) to proceed to 401(a)(4) in your situation, because you are trying to avoid the gateway in one of the plans.

[Mike Preston]

I thought the original request was for Company A to have a 3% TH min only? Now, it wants a new comp plan. Which is it?

Assuming it is a new comp plan with 3% to everybody other than the owner and the maximum that a new comp plan can support for the owner, that amount would be no greater than 9% in order for the gateway to be satisfied.

[dmb]

Mike, you're correct, i got caught up in the new comps, the plan for company A can be a std or non-std PS plan and only give 3% to everyone. And I also found out they want to do a 401k for both companies, so if i set up a prototype 401k PS plan for Company A and a New Comp 401k plan for Company B and pass 410b in the Company A plan can I test the Company B plan independently. Sorry for the confusion.

[AndyH]

dmb, a standardized plan document will require that all employees of all related corporations participate. What you want can be accomplished, but not without more flexible documents.

[Mike Preston]

Creating 401k plans as opposed to PS only plans will not modify the ability (or requirement) to test independently.