Basic Plan Design

[Gary]

My experience is almost primarily with DB plans to this point, but have a couple of fundamental points I would like to verify regarding a 401(k) plan that I am working with.

Background - This plan has only provided profit sharing allocations and 401(k) elective deferrals. The plan has 1 owner/HCE and 18 NHCEs.

Questions for verification -

1. Is it correct that the profit sharing allocations are tested for non-discrimination under 401(a)(4) and the 401(k) elective deferrals are tested under the ADP test? That is tested separately and independently of one another based on their respective testing procedures.

2. Can the profit sharing allocations section be amended to provide an allocation to a few groups where one of the groups has the names of 3 specific NHCE individuals?

Thanks.

[wmyer]

1) 401k elective deferrals are tested under the ADP test. If you have a safe harbor formula and 414(s) comp, profit sharing contributions will not need to be tested under 401a4. However, if you don't have such plan provisions, then you must test under 401a4, and 401k deferrals will be included in the average benefits percentage test.

2) Yes, although it is probably better to use job titles than actual names.

[Gary]

Thanks for your response wmyer.

The plan is not a safe harbor PSP.

So if I got this right.

401(k) deferrals as you say are tested under the ADP test only.

And the 401(a)(4) test for the PSP:

- does not 401(k) deferrals in determining rate groups for the ratio test, but

- DOES include 401(k) deferrals in determining rates in the ABP test?

So in other words, the plan may fail the ratio test for the one rate group, could have presumably passed the ABP test if 401(k) deferrals were ignored (i.e. using the same rates used in the ratio test), but yet fail the ABP test after using 401(k) deferrals due to the fact that the 1 HCE would defer the maximum?

So in conclusion, the 401(k) deferrals play a role in both the ADP test AND the 401(a)(4) test (iff the ABP test is required)?

Thank you.

[wmyer]

Yes, you got it. And as you know, catch-up 401(k) amounts are not included in either the ADP test or the ABPT test.

[Gary]

Thanks again.

I just had a telephone conversation with someone and he raised another issue.

The issue was whether returned elective 401(k) contributions due to failing the ADP test must be included in the ABP test.

I believe that the IRS opines that they s/b included, but I am not sure if it is explicitly in the regs.

While I realize that elective contributions are included in the ABP test, I did not see anything in the regs that is expilcit on that issue.

Thanks.

[Tom Poje]

you are correct, the regs are not explicit about whether to include excess contributions, but the general consensus is that you should. if they were recharacterized as cath up, then you definitely wouldn't.