Top Heavy Aggregation

[Guest lforesz]

I understand that in order to aggregate two plans for top heavy testing, the plans need to be aggregated for 401(a)(4). Law firm has two plans, one for assocaties (no employer contribtions) and one for staff and partners (cross-tested). If the plans are aggregated for top heavy, the group as a whole is not top heavy.

I'm not sure what we need to do to aggregate these plans for 401(a)(4). The ADP passes on an aggregated basis. No problem. The cross-test is where I get confused. Due to the mechanics of the cross-test, basically, all nonexcludable employees of the employer are considered. In the NDCT, we include eligible associates who do not benefit. They are zeros in the test and are in the rate group denominators. As required, we aggregate the plans for the ABT and coverage. The cross-test passes.

Have we therefore aggregated the plans for 401(a)(4) and can thus aggregate for top heavy? Am I oversimplifying this? Do we have to provide the minimum allocaton gateway to the associates in the other plan in order to satisfy 401(a)(4)? Not sure. If anyone has thoughts, please let me know.

Many thanks!!

Lori

[Mike Preston]

You have to provide the gateway, otherwise you aren't allowed to cross-test. If you aren't allowed to cross-test, the fact that the cross-test "passes" is irrelevant.

[Tom Poje]

I am either confused by the question or by Mike's answer.

If I understand the question, the associates did not benefit under a(4) - therefore they do not have to be provided the gateway minimum.

[Mike Preston]

Tom, if the plans are aggregated for Top-Heavy purposes, they are aggregated for a4 purposes, including the gateway requirement.

[Tom Poje]

Are you saying the associates have to be provided the gateway minimum?

they are not benefitting under the profit sharing portion, so I don't see where they have to receive the gateway, as long as plan passes 410(b).

[Mike Preston]

Tom, see 1.416-1 Q&A 7. Are you saying that you think a plan can be aggregated for 401(a)(4) purposes and still not cause a gateway contribution for those that do not otherwise receive an employer contribution? I don't think that the preamble to the gateway rules specifically addresses this point, does it? I don't have time to look this up this morning, as I'm off to an all day meeting in a few minutes.

Hmmmmmm, I'm thinking I like your position. Catch you later if I can.

[Tom Poje]

Mike:

Interesting.

I hadn't thought about T-7, which for those not looking it up, says

you can't permissively aggregate for top heavy unless the plans provide benefits that are comparable.

Obviously, if the associates receive zippo then you shouldn't aggregate to avoid top heavy.

But since you are providing the gateway minimum in the other plan, top heavy should be satisfied - unless you are providing less than 3%, which isn't likely. (or you have some NHCE who are active but received 0, or possibly you are trying to avoid giving some HCEs who are non keys any contribution)

Thus, in a round about way, which changes the original question -

plans are not aggregated for top heavy, thus plan is top heavy, but this has been met by the gateway minimum.

plans are aggregated for nondiscrim testing, and the gateway minimum does not have to be provided to the associates since the associates are at 0 (or are HCEs, and HCEs could be excluded from gateway)

[Mike Preston]

I'm not sure I agree with the comparable plan interpretation. For clarification purposes though, I agree with you that the gateway minimum in the case where the individuals in the associates plan neither have any contributions nor forfeitures is zero.

[AndyH]

This is interesting. Does this mean that a plan could have a 0% rate group which includes NHCEs, on the basis that they are not benefitting, therefore are not "employees" under the gateway regulation?

[Guest lforesz]

Hi,

It is interesting. I would presume that as long as you pass coverage and are not top heavy, you could have a NCHE rate group under the plan that receives zero.

I'm still uncertain about the comparable benefits issue under the top heavy aggregation rules as well. Maybe the comparable benefits is/was more an issue with a design-based safe harbor plan since you couldn't combine for 401(a)(4) and provide nothing to the other plan participants. But now, you could combine for 401(a)(4) and top heavy and not provide comparable benefits if the plan is cross-tested. You could technically still pass the cross-test with zeros to the other plan participants. Any further thoughts on this? It would be a good "ask the experts question". Thanks for your comments.

Lori

[AndyH]

The T-7 Q&A has been bothering me since Mike resurrected it.

Mike indicated that if we aggregate for top heavy, we aggregate for a(4) and 410(b). Is this correct?

Situation came up yesterday in my office. Takeover client has a ps plan and a separate k plan with two different TPAs. In addition, client has union employees in another plan which I believe is a multiemployer. Not sure if plan 3 is a MP or DB right now. It is one of those.

Apparently top heavy minimums have been missed for some people eligible for one plan but not the other. Somebody is proposing permissively aggregating plan 3, which would likely make the aggregated group not top heavy.

But since this is either a MP or DB or PS is mandatorily disaggregated from the K for a(4), right? Does that , or does T-7 preclude permissively aggregating for top heavy testing purposes?

It's been a long time since I looked at this stuff.

[Mike Preston]

Let's think about the consequences of permissive aggregation for TH in this type of situation. Certainly, as you indicate, the addition of the union plan, whether it is DB or MP, to the "mix" doesn't change the 401(k) testing (ADP/ACP). However, the employer contributions, if any, would be aggregated with the other non-union plan and the benefits from the union plan to determine compliance with 410(b) and, therefore, 401(a)(4).

Most of the time union benefits are heavily weighted towards NHCE's rather than HCE's. In fact, if the union plan participants are 100% NHCE's, the addition of the union plan can only improve the discrimination testing under a4, right? I suppose there are exceptions to every rule, but that would be my thought process.

Does that solve the problem?

[AndyH]

Right, Mike, agreed, but doesn't Q&A 7 preclude permissive aggregation if the benefits are not "comparable"? Do I need to do some sort of Average Benefits percentage test for each plan and make sure one result isn't more than 30% greater than the other?