Coverage Question

[Gilmore]

Two companies are owned by the same one individual. Both are maintenance companies and as such employ mostly lower paid workers with a handful of higher paid managers, no one reaching the HCE dollar limit however.

Company A employs a total of 131, including the owner. Company B employs 30, none of whom are HCEs.

The owner prefers to have two separate 401(k) plans, despite the fact that each has the same provisions, contributions, etc.

Each plan excludes participation by any employees except those of the adopting employer.

Am I thinking of this correctly?: Company A passes coverage with or without Company B. Without company B the NHCE ratio would be 130/160. Company B would pass coverage because, while the NHCE ratio is 30/160 the HCE ratio is 0/1.

Since the plans cover all the employees of the employer (Company A and Company B) separately I am assuming that I cannot use answer 3d on Schedule T? And that I must show the ratio test for each plan?

To take it one step further, if the manager of Company B does reach the HCE dollar limit and becomes an HCE, Company B will not pass coverage without Company A. The Plan would now benefit 1 of 2 HCEs and 29 of 159 NHCEs. I'm thinking I now need to aggregate the plans for coverage and also ADP testing?

Thanks for any clarification.

[Mike Preston]

Currently, each plan satisfies 410(b) independently. If aggregated, they would pass on an aggregated basis. You need to decide which way you want to establish compliance with 410(b) and then answer the questions on the 5500 in a way that is consistent with that. If you test 410(b) independently, then you would not be able to say that the plan for Company A covers all the NHCE's of the business, because, well, it doesn't.

If you test 410(b) on an aggregated basis, then you have one plan for testing purposes. Not only 410(b), but 401(a)(4) - which in this context means one ADP test. This may or may not be advantageous.

I'm not entirely convinced that just because the two plans can't stand on their own with respect to 410(b) as far as the ratio percentage test goes, that it necessarily follows that the two plans can't satisfy 410(b). If the combined plans satisfy the average benefits test it would seem to me that you would easily pass 410(b) independently.

[Gilmore]

Thanks Mike.

For now the manager at Company B is a long way from the HCE dollar limit, however should things change I may revisit this question again with you regarding the ABT.

Thanks again.