Merging a safe harbor 401(k) plan with non-safe harbor 401(k) plan

[Guest PenGuy]

I have an individually designed 401(k) plan which was drafted by an ERISA attorney which grandfathered the safe harbor matching contribution so that participants of the prior safe harbor 401(k) plan will continue to receive the safe harbor matching contribution while the pariticipants from the prior non-safe harbor 401(k) plan will receive a non-safe harbor matching contribution. We received a favorable determination letter on it.

For ADP and ACP testing, the ERISA attorney told me that we can disaggregate the prior safe harbor portion of the merged plan and deem the disaggregated portion as satisfying the ADP and ACP testing as long as each portion satisfies the coverage requirement, and that when we ADP and ACP test the non-safe harbor porition of the merged plan we would ignore the elective deferrals and matching contributions of the safe harbor portion of the merged plan. This did not seem correct because restructuring under §1.401(a)(4)-9© may not be used to demonstrate compliance with the requirements of section 401(k).

Can we disaggregate the safe harbor portion from the non-safe harbor portion of the merged plan to perform ADP and ACP testing? Following is the ERISA attorney's reasoning to why we can do it:

1) Section IX.B.1. of IRS Notice 98-52 states that "all CODAs included in a plan are treated as a single CODA that must satisfy the safe harbor contribution requirements...". That section also states that the rules for aggregating and disaggregating CODAs and plans under Sections 401(k) and 401(m) will also apply for purposes of determining what "plan" must satisfy the safe harbor rules. The Notice cites Treas. Reg. §1.401(k)-1(b)(3).

2) Treas. Reg. §1.401(k)-1(b)(3) states "See Section 1.401(k)-1(g)(11) for the definition of plan used for purposes of this section."

3) Treas. Reg. §1.401(k)-1(g)(11) states "The term plan means a plan within the meaning of section 1.410(b)-7(a) and (b)...".

4) Treas. Reg. §1.410(b)-7(b) states that "Each single plan within the meaning of section 414(l) is a separate plan for purposes of section 410(b). See Section 1.414(l)-1(b)."

5) Treas. Reg. §1.414(l)-1(b) states that "A plan is a ‘single plan’ if and only if, on an ongoing basis, all of the plan assets are available to pay benefits to employees who are covered by the plan and their beneficiaries...". This regulation goes on to state that "more than one plan will exist if a portion of the plan assets is not available to pay some of the benefits. This will be so even if each plan has the same benefit structure or plan document, or if all or part of the assets are invested in one trust with separate accounting with respect to each plan."

[Guest SBosworth]

It's my understanding that you can only disaggregate a 401(k) plan on the basis of whether or not employees in each group have satisfied the statutory maximum age and service requirements.