Eligibility for Cross Tested 401(k) Profit Sharing Plan

[Guest KDaugherty]

If you have a Cross Tested 401(k) Safe Harbor plan, and the eligibilty for the cross tested portion is two years and the Safe Harbor is only one year, are those people would just be eligible for the Safe Harbor also required to be brough into the plan early for the cross tested portion so that they pass gateway?

Please advise!

Thanks

[Blinky the 3-eyed Fish]

First, I will assume that the safe harbor nonelective contribution is being used and not the match. That being said, yes, those with only 1 YOS do need to receive the gateway.

Now when you cross-test the profit sharing allocation, you are only going to consider those that met the 2 YOS requirements for eligibility when determining the rate groups. The additional gateway for those with less that 2 YOS will only benefit you in the average benefits test.

[Mike Preston]

Wouldn't you normally want to include the SHNEC in the a4 testing for those who satisfy the 1 year eligibility but not the two year eligibility?

[Blinky the 3-eyed Fish]

Mike, your question got me thinking a bit. Do you feel in determining the rate groups you need to: 1) include all that met the 1 YOS requirement; 2) just include all that met the 2 YOS requirement; or 3) you have your choice between 1) and 2)?

[Mike Preston]

You know me too well. ;-)

I think that those with more than 1YOS who are receiving an allocation of employer monies (which is what the SHNEC is) count in the rate groups. Am I off base?

[Blinky the 3-eyed Fish]

Mike, I would never say you are off base. You certainly have much more experience and knowledge than me, so I always consider your opinion to be valuable. But how about this logic to argue against what you are saying?

Say as an example we have the same situation as first presented, except the regular nonelective contribution is not cross-tested, but rather allocated pro rata on compensation, a safe harbor formula.

Agree that the determination of 410(B) and 401(a)(4) would consist of the same people in the testing?

Agree that for the formula to be considered a safe harbor you would consider those receiving a lesser contribution (i.e. only a top heavy minimum or a safe harbor nonelective contribution) as not benefiting?

So, say we have many people who have only met the 1 YOS requirement. Can you see by including in the test all those who receive some form of nonelective contribution, you could have a situation where a safe harbor plan will be forced into general testing? There couldn't be a safe harbor 401(k) plan with a 2 YOS requirement for the regular profit sharing piece that would be safe from a potential general test. I am betting this scenario is allowable to be chosen in a standardized prototype.

So, the above situation where an otherwise safe harbor plan design is being forced into a non-safe harbor design by the addition of the safe harbor 401(k) nonelective does not make sense to me. That is why I answered the way I did in the first place and am not convinced it is incorrect. Thoughts?

[Mike Preston]

Haven't we already crossed this treshold when dealing with TH plans and participants that are only eligible for TH contributions, not the "regular" contributions? That is, even if the "regular" contirbution is a safe harbor, the only way one passes a4 testing is if the TH only participants are treated as not benefitting and those treated as benefitting are a 410(B) group.

If they are treated as not benefitting and the remaining group satifsfies 410(B), 1.401(a)(4)-2(B)(4)(vi)(3) says that (if you meet the other conditions) everything is ok.

But the situation you propose is not covered by the special exception for TH benefits, is it? I haven't reviewed the guidance on SH k plans to respond to this message, so there may very well be something in there which is akin to the above cited regulation.

Note that the above is only if the allocation to the "regular" group is a safe harbor allocation. If the allocation to the "regular" group is a cross-tested allocation, not even the TH only folks are excludable from the general test.

So I'm not finding any support for the position that a SHNEC contribution for those who satisfy statutory eligibility can be ignored when cross-testing a plan that provides a higher benefit to some people (those who meet 2 year eligibility) than others (those who only satisfy 1 year eligibility).

I guess I'm not as bothered by the fact that it is theoretically possible (unless we can pinpoint guidance to the contrary) that a SH plan with 2 year eligibility can be forced into general testing by the addition of a SHNEC contribution to those who have 1 year, but not 2 years. of eligibility service.

Nothing would preclude the plan sponsor from using restructuring if the 2-year group is a 410(B) group. Then you are back to where you want to be. Normally, using restructuring requires the separate groups to satisfy the 70% test, but in this case, I think a strong argument can be made that the restructuring satisfies reasonable classifications and can therefore use the ABT results.

In short, I think you can get to where you want to go (test the cross-tested allocation while treating those with less than 2 year eligibility as not benefitting - is that where you want to go?) via restructuring.

[AndyH]

Blinky, I don't know if we can trust Mike's answers any more. Look at the hours he's been keeping! 4:29 AM?

[Mike Preston]

My machine shows the prior message as 1:39am. Isn't that only 10:39pm here? That's not even dinner time on sime nights.

Is it showing up on your machine as 4:39 am? If so, then the 1:39am must be "real time" for my computer. That's not even bedtime!

So, take your pick: before dinner or before bed!

[AndyH]

yeah, 4:29 it says on my computer.

Now this makes a little more sense. I was beginning to wonder if you were a vampire!

[Mike Preston]

Who is to say I'm not?

[Blinky the 3-eyed Fish]

I would like to pose one additional question, "Vampire" Mike. In performing the 410(B) test for a safe harbor designed top heavy 401(k) plan (not a safe harbor 401(k) plan) with a 1-year wait for deferrals and a 2-year wait for profit sharing with the following census information, what would you say the ratio percentage is for the profit sharing piece assuming no general testing?

Met 2-year elig and received PS contribution:

HCE's - 2

NHCE's - 5

Met only 1-year elig and received only TH contribution:

HCE's - 0

NHCE's - 6

[Mike Preston]

For 410(B) purpuses, all are benefitting, so the ratio percentage is 100%. Something tells me there is going to be a followup question. Note that I believe the ratio percentage is determined as (11/11) / (2/2), not (5/5) / (2/2), just in case that is relevant to the followup.

[Tom Poje]

Wolverines may be a lot of things, but they ain't blood suckers, so you aren't fooling anybody, Mike.

Now buckeyes on the other hand.....

[Blinky the 3-eyed Fish]

You are right about the follow-up, but that needs to come later. First, how can it be (11/11)/(2/2)? Keep in mind that I stated this plan would not be general tested. So, we can't treat those that just receive the TH as benefiting.

[Mike Preston]

First things first. You asked that I answer only with respect to 410(B). I did that. Want to move to 401(a)(4)?

[Blinky the 3-eyed Fish]

My mistake, I meant to refer to the need to pass 410(B) to determine if the plan design is a safe harbor or not, not the general 410(B) test.

[Mike Preston]

Well, if our goal is to determine that the regular allocation is a safe-harbor, I can't seem to find anything that says we can test 401(a)(4) on the basis of 410(a)(1)(B) when the "plan" itself includes people who are in the plan who would otherwise not be in the plan if 410(a)(1)(B) were applied to the whole plan.

This whole issue of having a k plan that is top-heavy combined with a 2-year eligibility PS plan leads to results that are not necessarily desirable to the client.

If we could use permissive disaggregation to bifurcate the 410(a)(1)(B) eligible participants into their own plan for testing purposes, that would work, but the restructuring rules preclude that, don't they?

[Blinky the 3-eyed Fish]

Mike, I asked the question to Sal Tripodi at a conference I attended and he agrees with your comments. It's a good thing I have none of these plans.