Two 401(k) Plans - One Employer - Tested separately

[Guest critchfield]

Former PEO situation where it covered all employers in the PEO. The PEO seperated the employers into their own plan. The company who leases the employees is the sponsor of the plan for the leased employees (about 25). There are no employer contributions made to that plan. The other plan is for the 2 hces and 2 other nhce's that are not considered "leased". The company is the sponsor for that plan as well. The plans have been in existence since 2002. They have never been tested together... (401(k) contributions only!)

It is my understanding that:

- We will have to go back to 2002 and test the plans for each plan year as if they were one plan since leased ees for retirement plan purposes are considered ees of the leasing co.

- If the test fails, we will have to take corrective measures

Here are my questions:

- What programs are available for correction? (I believe we are past the deadline for APRSC)

- How many consultant hours would one expect the "fix" would take?

[E as in ERISA]

So what kind of contributions are you talking about? What test failure? Matching contributions? ACP failure? Profit sharing contributions? General discrimination issue?

[Guest critchfield]

So what kind of contributions are you talking about? What test failure? Matching contributions? ACP failure? Profit sharing contributions? General discrimination issue?

We are talking 401(k) contributions only... no employer contributions.

[Guest B2Randolph]

I am going to make some presumptions. I assume both are calendar year plans - just simply for explanation purposes.

A 2002 test including both plans should have been corrected prior to 12/31/2003, normally, but no later than 12/31/2005, in order to perform self correction of the significant operational failure, since I presume these errors do not meet the criteria for an insignificant correction. Consequently, your only option would be to use the Voluntary Correction Program (VCP). (See Section 9, .02 of EPCRS (Rev Proc 2003-44)). Appendix A indicates the correction is to make QNECs to the NHCEs, but if you use Prior Year testing, this is tough to do. In that event, you would want to correct using the methodology under Appendix B or some other method which would be comparable.

Potentially, you have until 12/31/2006 to correct the 2003 (and 2004) tests under significant self correction, but since you must file VCP for the 2002 year, you should file VCP for all years.

Tough to respond to hours because not sure what "consulting" means. All ADP/ADP & 410(b) tests will have to be redone, so you have that time period. Completion of the VCP paperwork will take approximately 5 hours per year if you are familiar with the program and from 10-15 hours per year if you aren't. Plus you have to build in some time to respond to the IRS thereafter.

If this is S, contact BM at DStransky's firm for more help if necessary.

[Mike Preston]

401(k) plans are not mandatorily aggregated for testing. The only reason to do so would be if one of the plans can't satisfy 410(b) on its own. Obviously, if the 25 employees who are leased are all NHCE's the plan covering the 2 HCE's and 2 NHCE's will not satisfy 410(b) and therefore the plans will indeed have to be aggregated.

But you need to do the 410(b) test first, because if, for some reason, the leased employees include some HCE's or if there are a large number of employees amongst the leased employees who are statutorily excludable it very well may be that the separate testing is just fine and dandy.