Permissive Disaggregation

[fiona1]

Can someone help me out with Permissive Disaggregation rules?

I understand that if the plan's entry requirements are less restrictive than the statutory maximum, then you can run additional tests and rely on those results for coverage and ADP/ACP.

Here is where I'm confused.

-You run 1 test with the total group.

-You run 1 test with the otherwise excludable group (those who do not meet the statutory requirements)

-You run 1 test with only those that meet the requirements.

So as long as you pass one of the three tests, you can rely on those results?

Is it true that you in order to rely on Permissive Disaggregation results for ADP/ACP, you must pass Permissive Disaggregation for coverage? Does that mean you must pass both Permissive Disaggregation tests, or just one?

Thanks for any clarification anyone can give me!!

[Mike Preston]

You need a bracket or two.

Try this:

Step 1: You run 1 ADP test with the total group. If you pass, STOP.

Step 2: If you fail, you test the excludables group and the non-excludables group to see whether each satisfies 410(b). If both groups satisfy 410(b), move to Step 5.

Step 3: You only get here if your excludable/non-excludables are such that the excludables group fails 410(b) [in normal situations, it means that somebody became a new owner!]. So you now move all the HCE's in the excludables group to the non-excludables [this is the option referenced at 401(k)(3)(F)]. Test your two groups again under 410(b). Note that the excludables automatically pass since there are no longer any HCE's in that group. Does the non-excludables group fail 410(b)? If so, STOP and correct the Step 1 ADP test. If not, move to Step 4.

Step 4: You get here only if your non-excludables, including the HCE's moved into the non-excludable category under 401(k)(3)(F), satisfy 410(b). Run your ADP test on this group. Does it pass? If so, STOP. If not, correct either the Step 1 ADP test or the ADP test you just ran; whichever is best for the Plan Sponsor.

Alternatively, you can return to Step 2 and redefine excludables based on a different interpretation of "excludable". There are two interpretations:

a) Those that are excludable based on statutory entry dates.

b) Those that are excludable based on plan entry dates.

Whichever you decided on when you initially performed the analysis in Step 2, do the other one.

Step 5: You get here only if your non-excludables and excludables satisfy 410(b) without application of 401(k)(3)(F). Run your ADP on the non-excludables. Do you pass? If so, STOP. If not, correct either the Step 1 ADP test or the ADP test you just ran, whichever is best for the Plan Sponsor.

Alternatively, you can follow the same path as the "Alternatively" section under Step 4.

The above assumes that there are no ACP amounts that can be tested together with the deferrals under the ADP test.

Complicated? Sure. But it really isn't that tough once you have done it a time or two.

[fiona1]

Great information.

Thank you very much.

[Guest cease]

Mike,

Thanks for the thorough criteria test. I have a question that relates to breaking the groups based on statutory entry dates. In a plan that has a One Year of Service requirement, I understand that a plan must allow for two entry dates. If the plan that I am testing has four entry dates, can I test based on the following example?

PLAN YEAR 08/01 - 07/31

Entry Dates are 08/01, 11/01, 02/01 and 05/01 following completion of 1 Year of Service and attainment of age 21.

The statutory entry dates would have been 08/01 and 02/01

Can I test elective contributions based on those with entry dates of 08/01, 11/01 and 02/01, AND those with an entry date of 05/01?

Thanks!

[Mike Preston]

The IRS has said that you can use the plan's entry dates or statutory entry dates, so if you believe what they have said, you are ok including those who enter on 5/1.

The problem with the whole thing is that sometimes entry dates other than statutory speed up when someone would be considered non-excludable. That is certainly the case with your more frequent entry dates.

But it can also go the other way. It only does so, though, when the service component is more generous than statutory. Take a plan that has no service requirement and therefore is allowed to have a single entry date. Let's assume calendar and assume the entry date is 1/1 following hire.

Now, if you apply 21/1 and the plan's entry dates you will find that you will push people into excludable you never thought were excludable. Only by using statutory entry dates along with 21/1 will it make "sense".

I think this is part of the reason that the IRS hasn't published detailed guidance on the issue. I would expect them to come up with rules that say something like you can do what you want as long as less people are excludable than what you would get with statutory rules (21/1 **AND** 1/1 and 7/1 entry).

But then again, there is no guidance so maybe they think it is just fine having some people defined as excludable who would otherwise be non-excludable!

Talk about a lot of words that don't say much, that is exactly what the above is. Until we get real guidance, though, we are all left in the dark as to what is really acceptable and what isn't.