Top Heavy Permissive Aggregation

[Guest lforesz]

I need to understand this once and for all or else I can't go on.

I understand that two plans can be permissively aggregated for top heavy testing, but that if the group is top heavy, only the plans that are required to be aggregated are actually considered top heavy.

However to permissively aggregate for top heavy testing(which helps many of our law firm plans that cover associates in a separate plan from the partners to avoid making a top heavy ctb), I also understand that the plans must then be aggregated for 401(a)(4), which is fine for the ADP test since the aggregated plans generally always pass ADP.

Now consider that the PS piece of the partner plan is cross-tested. The associates plan provides no PS contribution. However, because of the mechanics of cross-testing (consisting of the NCT and ABT tests) the associates are always included in the test if they cannot be statutoriallly excluded. So, in a sense, have I aggregated the plans for 401(a)(4) by simply cross-testing? Does this mean that the associate plan that is aggregated for top heavy does not need to provide comparable benefits or minimum gateways, as long as the "aggregated" 401(a)(4) cross-test passes with the nonexcludable associates treated as not benefitting.

Make any sense?

Please let me know and thanks!!

[Blinky the 3-eyed Fish]

I will try and go through the steps and maybe that will help (or maybe not).

First, a required aggregation group would exist if there was a key employee in both the plans or if the plans were being aggregated for coverage and nondiscrimination testing. I imagine you are not looking to aggregate the plans for coverage and nondiscrimination testing and I assume there are no keys in the associates plan. Obviously, there would have to be HCE's in the associates plan for it to pass coverage on it's own.

So, now by permissively aggregating the plans for TH you are hoping to lower the top heavy ratio (which it would since there are no keys in the associates plan). Whether the plan is cross-tested or not has no bearing on the end result for TH purposes, as the plans are not considered to be aggregated just because all plans are considered for the ABT. Thus, the end result is as you state. You do not have to provide TH benefits to the associates plan because of the permissive aggregation. You do not have to provide the gateway contribution to the associates plan because it is not being aggregated for coverage and nondiscrimination. You do have to treat the people in the associates plan as not benefiting for coverage and nondiscrimination.

[Mike Preston]

Hold on there, Quickdraw. If the permissively aggregated plans are NOT top-heavy, do you think the associates plan is exempt from TH and gateway issues? I concur that if the permissively aggregated plans are top-heavy that it essentially makes no sense to permissively aggregate them. But if you do permissively aggregate them for TH, aren't they required to be aggregated for 10(b)/a(4)?

Admittedly I haven't had one of these in a while and I may be misremembering things.

[Blinky the 3-eyed Fish]

Quickdraw? Anyway, the answer is no that plans that are permissively aggregated for TH purposes need to be aggregated for 410(b) and 401(a)(4). Plans that are aggregated for that purpose are part of the required aggregation group for TH purposes. So, there would be no such thing as permissive aggregation if the answer to your question was yes.

Also, regarding the TH and gateway issues: If permissively aggregated, the associates plan would not be TH no matter the results of the overall top heavy test. (Keep in mind I am assuming the associates plan has no key employees which would make it part of a required aggregation group.) If the plans are not aggregated for 410(b) and 401(a)(4) there would be no gateway requirement to meet, since the associates plan is not being cross-tested.

"I concur that if the permissively aggregated plans are top-heavy that it essentially makes no sense to permissively aggregate them. " - Mike, I am not sure what this means.

[Mike Preston]

I'm just having trouble with T-7. My recollection is that this Q&A essentially says that if you permissively aggregate for TH purposes, the permissive aggregation group must satisfy 401(a)(4). If so, wouldn't it be subject to the gateway?

The original post had the following phrase:"I understand that two plans can be permissively aggregated for top heavy testing, but that if the group is top heavy, only the plans that are required to be aggregated are actually considered top heavy. "

I have never thought about things in precisely that way, but the statement appears to be accurate. I _think_ it is saying that you go through the following steps:

1) Test the required aggregation group. If not TH, nothing further to do.

2) If TH, then permissively aggregate another plan and test again. If not TH, all is well.

3) IF still TH, then forget about permissive aggregation because it didn't get you anything.

The "undoing" of permissive aggregation gets you to the position where only the required aggregation group is subject to the TH provisions.

[Tom Poje]

Mike:

Not just T-7 but

416(g)(2)(A)(ii)

says plans may be permissively aggregated for top heavy as long as the top heavy plan continues to meet 401(a)(4) and 410(b) with such plan taken into account.

[Mike Preston]

Thanks, Tom. Good cite.

[Blinky the 3-eyed Fish]

Crap, I hate it when I am wrong. Next time I will just nod politely with whatever Mike says.

[AndyH]

Now I'm confused. Would somebody kindly state a conclusion for the benefit of the class?

Mike, I'm with you except for your #2:

"2) If TH, then permissively aggregate another plan and test again. If not TH, all is well."

Didn't you conclude that if you aggregate then you need to apply the gateways and test together under a(4)? The above seems to me to contradict what I thought was the conclusion. You're not actually done, i.e. all is NOT well. Right?

[Mike Preston]

In order to permissively aggregate, the aggregation group is tested together under 410(b)/401(a)(4). When I said "all is well", I meant: "OK the plans aren't top-heavy." I did not mean to imply that, once aggregated and not top-heavy, the entire aggregation group is NOT subject to aggregation under 410(b)/401(a)(4). It is. And the gateway issues flow from there. Sorry for the confusion.

[Mike Preston]

Lori, my take on this is that the associates plan is indeed subject to gateways if you go about it the way you have described. But I'm not sure it makes a whole lot of sense to do it that way. What is the downside associated with not aggregating the associates' plan? Well, it looks like the only way the combined plans were not top-heavy was by considering the associates plan as part of a permissive aggregation group. If you don't permissively aggregate the associates' plan then the other plan (or plans) appear to be top-heavy. Is that really a big deal? If the other plan (or plans) are cross-tested and subject to the gateway, you have very few people entitled to a top-heavy allocation in excess of the required gateway anyway. Yes, I can see where there might be some people who would not be entitled to the gateway, such as statutory excludibles, but is the provision of TH benefits to that group less expensive than the gateway for the associates? I also recognize that the vesting schedule might be an issue.

[Guest merlin]

Just to clarify something for the benefit of those of us who are late for class, could we go back to the original post for a minute? There seems to be a separate question buried in the last paragraph. " So, in a sense have I aggregated the plans... simply by cross-testing"? If the plans are not otherwise aggregated I think the answer is no. Inclusion of a plan in the ab%t in and of itself doesn't constitute aggregation, right?

[Mike Preston]

Right.

[Guest mab]

Good thread!

I have one somewhat related question:

If plans are permissively aggregated in order to pass coverage testing, must they be permissively aggregated for the ADP test? Does the reverse also hold true? (If plans have to be permissively aggregated to pass ADP, must they then be permissively aggregated for coverage testing purposes?)

If so, is there a cite out there on this? The correction methods for flunking ADP under this scenario would be pretty straightforward but what if coverage flunks?

Tx for any insight.

[Mike Preston]

Yes.

Yes.

Yes. ;-)

If coverage flunks, the employer must bring others into the plan and provide an employer contribution pursuant to EPCRS. I believe that amount is the average of the ADP for the NHCE's who participated in the plan.

[Guest mab]

I was afraid that those were the answers. I assume I should find the cite somewhere in the 410(b) regs.

Tx for the input.

[Mike Preston]

Citations are a bit tough in this area because to complete the circle requires a lot of cross-referencing. You might start with 1.401(k)-1(g)(11), though.

[Guest merlin]

Assuming the nondiscriminatory classification test is passed, can you not also cure the coverage failure by making a nec sufficient to pass the ab% test?

[Mike Preston]

Sure. When I say "coverage" I mean satisfaction of 410(b) in any way that "works."

[Blinky the 3-eyed Fish]

Mab, I fear that there may be some information missing in the overall picture. Do you mind describing the 2 plans - who they cover, and are deferrals, matching contributions and nonelective contributions being made?

[AndyH]

Dittos. I was wondering the same thing.