Consistent Treatment of Otherwise Excludables?

[Guest merlin]

I have a 401k plan where it helps to do the ADP test by disaggregating the otherwise excludables. Due to a quirk in the plan language, anyone employed on 7/1/02 gets an allocation, so it will help my ab% test to not disaggregate them. Can I treat them inconsistently for the two different tests?

[AndyH]

Merlin, what are you testing under the average benefits test, deferrals? If you are testing a discretionary contribution, then that is a separate plan, and you have all options available to you.

[Guest merlin]

Deferrals,match, and nec. Some OI's deferred,some didn't, so the net effect is that they hurt the adp/acp test.

But they all got the nec allocation, including the gateway. They're all young, so the EBARs are high, and this is the difference between passing the ab% test and failing. The two rate groups fail the r%t, so I need the abt to pass a4.

Thus I want to kick them out of the adp/acp, but keep them in for the abt, i.e a4. Something about having cake and eating it too.

[AndyH]

So it sounds like you are testing the discretionary, which is mandatorily dissagregated from deferrals, so the ADP test has nothing to do with the test of the discretionary.

So if you have a rate group that falls below 70% and you go to the ABPT, that is still part of the a(4) test for the discretionary, even though you must pull in deferrals. Again, the ADP test has nothing to do with the cross test, including the ABPT part, which is still part of the test of the discretionary.

I suppose in the coverage test for the deferrals then you would need to be consistent, but certainly not the a(4) or 410(B) test of the discretionary.

[Blinky the 3-eyed Fish]

Andy, I wasn't 100% clear on your answer but I think I agree.

You are saying: that you can choose to separately test otherwise excludables for the ADP/ACP tests but not separately test otherwise excludables in cross-testing the nonelective contribution. When running the average benefits test while cross-testing the nonelective contribution, you would include the otherwise excludables' deferrals and match. For coverage and nondiscrimination within each component (401(k), 401(m), and nonelective) the treatment of otherwise excludables needs to be consistent.

Right?

[AndyH]

Right (at least your last sentence). I'm not clear on your other sentences. Maybe you can try responding to Merlin directly and I'll see if I agree.

[Blinky the 3-eyed Fish]

Let me try again.

401(k) test is run separating the otherwise excludables (NHCE's only I believe, but I don't do these tests very often).

Cross-testing is run with everybody in the test, otherwise excludables and all. The average benefits test also includes the deferrals of the otherwise excludables.

This is what I thought you were saying Andy and that I agree this is allowable.

[AndyH]

Right. The cross test includes the otherwise excludables OR it can be done by separately testing the otherwise excludables. Either way regardless of how ADP testing was done.

What complicated my thoughts was coverage testing of the disaggregated deferral component. If you separately test otherwise excludables for ADP, does that require that you separately test excludables for 410(B) testing of the deferrals. I think so but I'm not 100% sure without looking it up since I don't do that often either.

[Fred Payne]

Andy H: You've confused me with your comment:

"The cross test includes the otherwise excludables OR it can be done by separately testing the otherwise excludables. Either way regardless of how ADP testing was done."

Are you suggesting that there can be some disaggregation when conducting this test?

I understood that the ADP test is a distinct test from the cross-test of the PS. One really doesn't have anything to do with the other. The PS Cross-test is done with only one coverage group.

For the PS cross-test, I first determine who is included in my coverage group. If they are excludable, they are out, pure and simple. Howver, if--and this I found important--if they have received a matching contribution from the 401(k) or are to get a PS match EVEN IF THEY ARE OTHERWISE EXCLUDABLE, they are in the PS crosstest's coverage group. The issue for me is if they are in the coverage group, are they considered benefitting or not. If they do not benefit (i.e., an active participant who termed with more than 500 hours), they are included in the denominator for my coverage ratios and average benefit percentage tests, but they are NOT included in the numerator nor do they get a PS contribution.

All Participant's matching contributions IF NOT A QNEC OR SHNEC will not factor into the Ratio Percentage Test or the Nondiscriminatroy Classification test, but they will be considered in the Average Benefits Test. If I pass the Ratio Percentage Test, the PS cross-test is over. I just have to make sure I passed the ADP and ACP tests. If I need to perform the Average Benefits Test to pass the cross-test, then the match of the "otherwise excludable" becomes a factor (as well as their inclusion in the coverage group.)

[Guest merlin]

As the guy who started this whole thing, let me try to summrize Andy/Blinky's response as I understand it, then Fred can weigh in if he sees fit.

WRT the testing treatment of the O/Is, the key is the mandatory disaggregegation of the k/m portions from the nec. There is no requirement that they be treated the same way for a4 as for adp/acp. They can be included for one and not the other.

In my specific instance, the O/Is hurt the adp/acp so I disaggregate them. They help me pass the ab% test because they produce high EBARs, which in turn lets me pass the a4 test with each rate group

Fred's answer seems to focus on the mechanics of the test once I've decided who I'm including for what tests.

Are we on the same page yet (or still)?

[AndyH]

Bingo, Merlin. But Fred may need some more help.

[Guest merlin]

Don't we all! Many thanks, Andy and Blinky.

[Fred Payne]

I agree that you can disaggreagte the adp/acp test. And I would run the a4 test "aggreagted" as you had. So I think we're on the same page.

AndyH's comment cofused me as to the ability to run the a4 test in a disaggregated fashion. I just never knew that the a4 crosstest could be disaggreagated or even how you would do it if you could.

[AndyH]

Fred, if you have a plan with a discretionary contribution, deferrals, and a match, for (a)(4) and 410(B) you have three entirely separate plans. Just think of it as three physically different plans. You test all three separately because they are MANDATORILY disaggregated. You have separate testing options because you have separate tests for each separate plan.

The only thing you would pull them together for would be the average benefits percentage test if needed because the regs say that you must include all plans that could be aggregated, with the specific condition that for this purpose you IGNORE the exception for k and m disaggregation, so for this purpose you treat them as if they COULD be aggregated. But again, ONLY for the ABPT, only if needed. And you normally don't need to do this test when you are testing the K or M "plans". You would only use ABPT then if you have a problem with the ratio percentage test.

The ABPT is normally pertinent only when you are testing the discretionary contribution under the general 401(a)(4) test, i.e. cross testing or general testing on a contributions basis.

[Fred Payne]

AndyH:

Your last post was clear and precise. And it's what I had thought was the case.

I was just confused by the wording on a previous post of yours thinking it might have said something contradicting your last post which, as I said, was clear and precise.