Passing 401(a)(4)

[Archimage]

Let's say you have a plan that uses a SHNEC. The plan also has an integrated non-elective contribution. Would this plan design lose the 401(a)(4) safe harbor status since it has two different formulas?

[Mike Preston]

Not if it meets the uniformity requirements. In this case that would mean that both formulas must be available to the same group of employees. BTW, which safe harbor status are you referencing? The one that allows the k plan to auto pass the ADP or the one that allows the formulas to escape general testing? The answer to both is the same, but I'm curious which one you meant.

[Archimage]

Yes, I was referring to the one the safe harbor that allows the formula to escape general testing. I forgot to mention that the additional nonelective contribution has a 1000hr/last day requirement. Would this change your answer?

[AndyH]

Archimage, you do understand that the 3% SHNEC must be ignored for purposes of determining the maximum integration, right? Those two don't mix.

[Archimage]

Yes, I do understand that part. My thinking is that the 3% SHNEC formula and my other integrated formula could lead me to having to do the general test just as you would for a plan that has a regular PS contribution and a top heavy formula that does not meet the safe harbor requirement of the general test. I am sure I am missing something in my thinking so please give me some guidance.

[Archimage]

I think I have it figured out. I can restructure the plan into two component plans. One component being those eligible just for SHNEC and the other component being everyone eligible for both. Both of these components would satisfy the designed based safe harbor so I do not have run the general test. Let me know if I am off base here.

[AndyH]

You don't need to even do that. See 1.401(a)(4)-2(b)(4)(vi). You just need to meet simple conditions and the multiple formulas can still result in safe harbor status.

[Mike Preston]

Andy, I don't think that the multiple formulas satisfy the uniformity requirements in light of the 1000 hours/last day rule. Hence, Archimage is correct that the plan must be restructured as indicated in order to satisfy the safe-harbors. However, the question becomes whether it is necessary to restructure at all. If the aggregated allocations satisfy the general test, restructuring is unnecessary. It becomes a question of which is easier to prove: compliance with 410(b) on the restructured plans, giving one an auto-pass on 401(a)(4), or satisfying the general test on the aggregated allocation, thereby avoiding the need to test the restructed plans for compliance with 410(b).

I can't hardly imagine a plan that gives 3% to those who are eligible for the SHNEC and an integrated allocation to others that wouldn't pass the general test on a contributions basis But I suppose it is possible.

[KJohnson]

Mike, I had always thought, like Andy H, that you would satisfy 401(a)(4) under the multiple formual safe harbor, but I can see now that you are right.

As to going to restructuring, as I follow your reasoning, you could break the plan into component parts, those participants that were employed on the last day and with 1000 hours and those that were not. Thus the employees that only received the SHNEC (i.e. not employed on the last day and/or did not work 1,000 hours) would satisfy a safe harbor for 401(a)(4). However, the employees who were there on the last day and had 1000 hours would still have multiple formulas. My question is whether you still have to generate the general test on this group (although they would obviously pass) or can you say this is now a 401(a)(4) safe harbor component as well since all particpants in the component group are eligible for both formulas. My reading is that you would still be required to produce the general test.

[Mike Preston]

You may be right. The regs are so convoluted at this point that different conclusions are possible, I suppose. I infer from the way the -9 reg is written that the general test is not required on the component plan. The limitations on the use of the uniformity rules are spelled out in -9 (and include such things as gateway rules). Those limitations don't impact this particular fact pattern. The only way I can see that general testing would be required is because the language of -9 makes it clear that the uniformity rules are to be applied against the DESIGN of a plan, not the OPERATION of the formulas. That leads to an ambiguity in this case. Does the restructure count as part of the design? I think an argument can be made that it does. If that argument fails, though, your conclusion is correct. Maybe to be safe, do it both ways!

[Tom Poje]

The ERISA Outline book describes this example as follows:

...Technically, the plan is not designed based and must perform the rate group test. However, if the group receiving the additional nonelective contribution passes coverage...then 401(a)(4) is satisfied anyway, since the rate group test is merely a collection of seperate coverage tests... (11.401, 2003 edition)

[KJohnson]

I think Sal's approach is Mike's preferred way of doing it--just run the general test on the whole plan--forget the component plan concept. I think I agree that as long as your additional nonelective contribution passes 410(b) it should be a mathematical impossiblity to fail 401(a)(4), but do you just stick a coverage test in the file for this or do you go through all the steps of the general test?

As to the component test concept, my concern was actually what Mike raised--It appears that this is a design test rather than an operational test. Just because you can come up with component groups where you satisfy the formula uniformity requirement in application does not mean that the formulas, by design, are uniform.

[Mike Preston]

OK, I think I came up with a situation where the general test might fail even though a component plan would pass the safe-harbor, if it were available. I think Sal's comment is meant to be restricted to a plan that satisfies the integration rules at the maximum permitted disparity factor (5.7% currently). IIRC, the general test does not allow use of lower permitted disparity factors, so the statement that the test is merely an aggregation of separate coverage groups is not correct if permitted disparity is being tested under a4 and the integration factor isn't 5.7%.