Proposed regs for coverage testing for 401(k) plans of tax exempt employers

[Belgarath]

I'm having a heck of a time understanding the practical application of the new proposed regs under 1.410(b)-6(g), probably because I'm unable to relate them to a real life situation. Perhaps some of you 401(k) specialists can help me out?

Suppose you have a 501©(3) organization, that currently sponsors a 403(b). Now the employer decides to offer a 401(k) as well.

Under (g)(2) of the proposed regulation, it says that employees of a tax exempt organization who are eligible for a salary reduction under the 403(b) plan may be excluded if:

(i) No employee of the organization is eligible to participate in the 401(k) plan, and

(ii) At least 95 percent of the employees of the employer who are not employees of the organization are eligible to participate in the 401(k) plan.

I note that (i) and (ii) use separate terms - organization and employer. But (i) and (ii) seem to me to lead you in a circle. First, you have to satisfy (i) that no employees are eligible to participate, then in (ii) at least 95% of the employees must be eligible to participate! But it distinguishes, in (ii) that the "employees of the employer who are not employees of the organization" must particpate. Now, what the heck does that mean, and what type of arrangement gives you employees of an "organization" who are not employees of the employer? Some sort of affiliated service group where they want to exclude certain employers within the group from participation in the 401(k)?

Hellllppppppp...... Thanks in advance, and my sincere congratulations to those who can make sense out of this.

[Guest dietpepsi]

It does not apply if you are a 501©(3) organization that sponsors both a 403(b) and a 401(k). It applies if you are part of a controlled group, part of which is a 501©(3) organization with a 403(b) and part of which is not 501©(3) and is "for profit". I've had 501©(3) hospitals but the doctors also have a "for profit" clinic. So, in this case, the doctors can have their 401(k) plan for the clinic and can exclude the hospital employees from coverage, even though they are all part of the same controlled group.