ADP/ACP test & 410(b) test of a controlled group

[Guest jkrad]

An individual owns 100% of 5 different companies. He receives a wage and defers at 1 company only. Out of the 5 companies there are only 2 HCE. When testing for the ADP/ACP are all 5 companies tested together or are they tested separately?

I have been told that you first test together and if the test fails then you test separately.

Does the same scenario hold true for the 410(b) non discrimination testing as far as testing together and if they fail, test separately?

[austin3515]

Unlike the chicken and the egg, coverage always comes first.

If each plan can pass coverage on it's own, then each can test on it's own. This is what I would do first.

If that fails, you will need to aggregate plans (i.e., test them together) until you find a combination where they all pass. Try to get each HCE in one "aggregated plan" if you can. You can test plan's 1 and 2 together, 3 4 and 5 together, 1 through 5 together etc. Whatever groupings you use to pass coverage, you need to pass the ADP test on those groupings as well.

[Guest George Chimento]

<<Unlike the chicken and the egg, coverage always comes first. If each plan can pass coverage on it's own, then each can test on it's own. This is what I would do first. If that fails, you will need to aggregate plans (i.e., test them together) until you find a combination where they all pass. Try to get each HCE in one "aggregated plan" if you can. You can test plan's 1 and 2 together, 3 4 and 5 together, 1 through 5 together etc. Whatever groupings you use to pass coverage, you need to pass the ADP test on those groupings as well.>>

"Austin", I agree with your answer. An insurance company compliance person recently came up with an odd take on this. She said that this technique would only be available if the company sponsored a separate plan (i.e. separate dosument, separate 5500, separate audit), rather than being part of a controlled group which had adopted a plan that permitted different levels of match for each participating company.

I have always felt that if the population of a company within a controlled group passed 410 coverage that it could do the ACP separately, provided plan language permitted that result. Having to adopt a separate plan and go through a separate audit seems wierdly excessive for each company within a controlled group that wants to do ACP testing solely for its own employee population. Do you have any black and white precedent that would support my position? Or am I wrong?

[Mike Preston]

Neither, as it depends on plan language. In most plans I've seen, though, you would be wrong because of plan language, not because it is impossible, theoretically, to do what you suggest.

[Belgarath]

Hold on a second here - maybe I'm misunderstanding the question/answer in regards to 410(b) testing.

When you say if each plan can pass coverage on its own, do you really mean if each plan can pass coverage on its own when aggregated with the other CG members?

What I'm trying to get at is that if you have 2 different businesses that are part of a CG, you couldn't, for example, have business 1, with 10 HC and no NHC, and cover all 10, while in business 2 with 2 HC and 100 NHC, you cover 1 HC and only 35 NHC. While both of these would pass coverage "on their own" they must be aggregated for 410(b) testing.

[Mike Preston]

I disagree that each plan in your example would pass coverage on its own. Passing coverage for a plan is always defined in terms of ensuring that the ratio percentage of that plan exceeds the applicable minimum. When determining the ratio percentage of a particular plan one must take into account all employees of the entire controlled group. That wasn't explicitly stated because it is always a given in any calculation.

[austin3515]

My original post (over 2 years ago!!) is correct only if there are 5 plans (I can see I had assumed that in my post). My understanding is that if you have one plan, you have one ADP test. Everyone is tested together. Am I correct that all 5 companies are covered under a single plan?

Retsructuring is available only for nonelective contributions.

[Belgarath]

Mike - we are completely agreeing with each other, (or at the very least, I'm agreeing with you) - just stating it a little differently. I just wanted to make sure that they weren't thinking that you could pass 410(b) by testing each plan in a CG as a stand alone plan (hence my "on its own" in the quotation marks) without aggregating them, 'cause as we all agree, you can't.

While I thought I was making that clear, I evidently didn't, so my apologies to all if it caused any confusion.

[Mike Preston]

Austin, do you really expect an answer?

[austin3515]

That's the best icon I could find for, "daggonnit I hate it when I say something stupid..."

[Guest George Chimento]

>>My understanding is that if you have one plan, you have one ADP test. Everyone is tested together. Am I correct that all 5 companies are covered under a single plan? Retsructuring is available only for nonelective contributions.>>

Thanks for the response. Your "aged" post came up on my Google search.

The situation I am thinking of is that 5 companies in a controlled group each have a component of hce's and nhce's. Each company would pass coverage under the salary ratio test (taking all controlled group members into account, of course). Let's assume the companies cannot be characterized as QSLOB's due to the 50 employee limit in some cases and other factors.

For convenience, it's been proposed that all companies join into a single 401(k) plan with a matching feature that would establish separate matches for each company, based on business achievement. The Plan language would provide that the ACP test would be applied separately to each company's "plan" (provided it passed coverage) within the controlled group plan.

The point of this is simply to administer one ERISA plan, rather than 5 ERISA plans. I know that restructuring is prohibited under 1.401(m)-1©(4)(iv)(B). However, is restructuring really involved in this hypothetical? Isn't the single ERISA Plan for these 5 controlled group members actually 5 plans for testing purposes? Is it really necessary to create 5 separate ERISA plans in order to justify separate ACP testing?

[austin3515]

One plan, one controlled group, one test.

Note: One plan, 5 controlled groups, 5 tests (i.e., a multiple employer plan).

Note: 5 Plans, One Controlled Group, up to 5 Tests, if each plan passes coverage, yada yada see my original post.

[Mike Preston]

Which, in case it isn't clear from Austin's response, no to your first question, yes to your second.

[Guest George Chimento]

<<Which, in case it isn't clear from Austin's response, no to your first question, yes to your second.>>

I agree, but I wonder what on earth is the reason for this "position" in the regulations. It's not well thought out. It makes no sense that a controlled group (with bona fide employers which have HCE's and NHCE's in each company) has to go through all of this extra expense in order to support separate ACP testing.

[austin3515]

Tell ya what, you run for Congress, and I'll vote for ya

[Guest Richard Tennenbaum]

All,

I'm not sure that I follow one of the points made. It is my understanding that you may have a single plan that covers more than one line in a QSLOB and that you may test separately for each line.

For example, if Company A and its sub, Company B, meet all of the requirements of a QSLOB, file the 5310-A, etc., then they may test 410(b), 401(a)(4), ADP & ACP tests separately for each line as well, regardless of whether or not they use a single plan document as opposed to two documents. Am I on the same page here?

This is a poignant topic. I have a client that acquired another company that has a rich profit sharing contribution. They want to keep it that way, but to save on the costs of multiple audits and multiple 5500s for multiple plans, they suggested looking into whether or not they could keep the plan contribution provisions distinct, but combine into a single plan document. At first blush, I believe it is possible using SLOBs, unless I'm missing a reg provision that is counter to this.

Comments appreciated,

RT

[austin3515]

I stand corrected: If you're willing to go through the QSLOB rigamarole (sp?) you can indeed run 5 tests in one plan.

1.414®-8. Separate application of section 410(b)

© Coordination of section 401(a)(4) with section 410(b)--(1) General rule. For purposes of these regulations, the requirements of section 410(b) encompass the requirements of section 401(a)(4) (including,but not limited to, the permitted disparity rules of section 401(l), the actual deferral percentage test of section 401(k)(3), and the actual contribution percentage test of section 401(m)(2)). Therefore, if the requirements of section 410(b) are applied separately with respect to the employees of each qualified separate line of business of an employer for purposes of testing *ONE* or more plans of the employer for plan years that begin in a testing year, the requirements of section 401(a)(4) must also be applied separately with respect to the employees of the same qualified separate lines of business for purposes of testing the same plans for the same plan years. Furthermore, if section 401(a)(4) requires that a group of employees under the plan satisfy section 410(b) for purposes of satisfying section 401(a)(4), section 410(b) must be applied for this purpose in the same manner provided in paragraph (b) of this section. See, for example, §§1.401(a)(4)-2©(1) and 1.401(a)(4)-3©(1) (requiring each rate group of employees under a plan to satisfy section 410(b)), §1.401(a)(4)-4(b) (requiring the group of employees to whom each benefit, right, or feature is currently available under a plan to satisfy section 410(b)), and §1.401(a)(4)-9©(1) (requiring the group of employees included in each component plan into which a plan is restructured to satisfy section 410(b)). Thus, the group of employees must satisfy section 410(b)(5)(B) on an employer-wide basis in accordance with paragraph (b)(2) of this section and also must satisfy section 410(b) on a qualified-separate-line-of-business basis in accordance with paragraph (b)(3) of this section, in both cases as if the group of employees were the only employees benefiting under the plan.

[gc@chimentowebb.com]

[i stand corrected: If you're willing to go through the QSLOB rigamarole (sp?) you can indeed run 5 tests in one plan.]

In fairness to you, my question did not involve QSLOB's. It was a controlled group with separate companies where QSLOB status would not have been possible for the employers (i.e. 50 employee test, healthcare, etc). For convenience and to limit audit expense, the 401(m) plan would have allowed all companies to participate, but only some of the companies would provide a match. (This was to compensate for the fact that their employees don't participate in a DB plan that the group sponsors.)

No discrimination was intended. Each company group within the 401(m) plan would have passed 410 using the ABP test taking the match into account. However, the requirement to pass the ACP test on a plan wide basis, rather than on the basis of separate employer groups within the 401(m) plan that pass 410, makes this impossible.

It's unfortunate to have to go through the expense of separate 401(m) plans just to be able to do separate ACP tests, but that seems to be the result. I was hoping there was some alternative.

GC

[austin3515]

I'm not sure why you are concluding that QSLOB's are not an alternative. If you have 5 separate companies, you oughta be able to have 5 separate QSLOB's. I'm not entirely familiar with the rules on being a QSLOB, but it's not exceedingly difficult to have QSLOB's.

[gc@chimentowebb.com]

[i'm not sure why you are concluding that QSLOB's are not an alternative.]

There are problems creating QSLOB's in the healthcare industry.

For example, even when broadly based, large affiliated service groups can't be separated into QSLOB's.

Also, if you don't have a mix which satisfies a QSLOB population safe harbor, you have to separate into approved industries, and medical services can't be separated.

[austin3515]

I did see that as well, regarding ASG's.

Sounds like you were way ahead of me when these conversations began

[Guest Richard Tennenbaum]

I stand corrected: If you're willing to go through the QSLOB rigamarole (sp?) you can indeed run 5 tests in one plan.....

Austin, I believe you're right...but in this situation, would you still have only a single audit and a single Form 5500? For example, in your situation, you have a single plan document with 5 qualified separate lines of business participating. Presumably, there are 5 different benefit structures (matching formulas may differ, profits sharing formulas differ, etc.)....you would run 410(b), ADP, ACP, etc. separately, 5 times for each QSLOB...however, do you still file only a single Form 5500?

Thanks,

RT

[austin3515]

One plan one audit. All the rules discussed here are IRS and do not apply for purposes of applying the reporting requirements under ERISA.