Cross Testing without Profit Sharing

[Nate X]

Can you pass 410(b) for 401(m) contributions using the average benefit test or must you use the ratio percentage test since the contributions must be tested separately? Can anyone point me to a good reference other that the ERISA outline book or 1.410 in the treasury regs?

[Tom Poje]

well, if you toss out the regs 1.410(b) which deal with coverage, and the ERISA Outline Book which will refernce the regs you do make it difficult. any other resource is also going to reference the regs. I could say the Coverage and Nondiscrimination Answer Book, but same thing thing will happen, your particular question is not addressed 'directly' but would certainly be answer or implied in one of the questions in the book. but since I have to submit some material to the book from time to time, this is how I would answer your your question.

and I'll start with a little clarification on cites.

if you see a '1-xxx' that is from the Regs

if there is no '1-xx' then it is from the Code

don't confuse the two, though they are similar and basically cross reference each other.

this 1.410(b) is the regs and 410(b) is the code.

So, from the code

410(b) Minimum Coverage requirements

(1) in general

....the plan meets one of the following

(A) .....passes ratio percentage test ...or

(B) meets requirements of paragraph (2)

(2) Average Benefits Test

(A) In general

(i) .....basically this says plans ratio % > safe harbor %, and you dont have an unreasonable classification (such as excluding people by name - but this is found in 1.410(b) and you requested that not be used)

(ii) ...plan passes Average benefits percentage test

I believe 'plan' is also defined in the regs, so you put me in hard place to say that means a 401(k) plan consists of 3 'plans' - 401(k), 401(m) and nonelective, though I suppose I could point to the 5500 instructions which clearly indicates this as well.

hope that helps.

God bless and have a Merry Christmas!

[Nate X]

Sorry for the confusion. This doesn't really answer my question. Let me rephrase. The rule for 401(k) and 401(m) is that they must be tested seperately for coverage. The only way to test them using the average benefits test is to combine 401(k), 401(m), and nonelective together. So if you can pass coverage for 401(m) using cross-testing, then your not really testing it seperately other than the classification test.

So assuming it is correct that I can pass coverage for 401(m) using cross-testing, does that mean I can also use it to pass coverage for deferrals even if the plan doesn't allow employer contributions at all?

Thanks!

[Tom Poje]

I guess I am still confused.

I must pass coverage separately for

401(k)

401(m)

nonelective (which it sounds like you have none this year)

now, I can pass coverage for 401(k) using either ratio or avg ben test

I can pass coverage for 401(m) using either ratio or avg ben test

I do not have to use the same method for both tests.

now I test 401(k) ratio and for whatever reason it is 68%

I test 401(m) ratio and its ratio is at 43%

I look at avg ben % test which luckily is at 71%. this is the same no matter whether I look at 401(k), 401(m) or nonelctive because it combines all contributions.

so I pass that portion.

the 401K ratio was 68% which is greater than any safe harbor possible,so that passes

the 401(m) is at 43% - as long as that is greater than the safe harbor % I pass. the safe harbor % is determined based on the NHCE concentration % - most simply look it up on the table.

all this of course has nothing to do with nondiscrimination, which is the ADP or ACP test

[AndyH]

I have no idea what the initial question was, but, Nate, your most recent comments are correct if that is what you are seeking to confirm. But you did need to reach the safe harbor percentage, let us not forget, without cross testing.

[Nate X]

Thanks guys. I had been stuck in a mostly prototype world in the past and just couldn't believe that one could pass coverage for 401(k) contributions using cross-testing. Always more to learn.

[jquazza]

If you look at treas reg 1.410b)-7(d), it clearly says that plans are not aggregated for nondiscrim (adp/acp) if they are aggregated solely for the purpose of the avg. ben. ratio test