Must Plans Be Aggregated For Gateway Testing

[ERISA1]

If an employer has the right demographics so that it can establish two separate plans - i.e., each plan separately passes coverage and discrimination - must the Gateway Minimum requirements under one plan be applied to the other plan?

Example: Company has 2 HCEs and 2 NHCEs. Employer creates two plans; one covers HCE 1 and NHCE 1; the other plan covers HCE 2 and NHCE 2. Both plans will be cross tested. However, Plan number one only provides 3% to the NHCE and 9% to the HCE. The employer would like to fund Plan number two at 5% for NHCE 2 and 15% for HCE 2.

Each plan separately satisfies minimum coverage. Assume that age disparity in each plan is adequate so that each plan passes (a)(4) testing.

I read the regs under 1.401(a)(4)-8 as requiring a "PLAN" to satisfy Gateway requirements. Thus, in the example above, each plan should be able to separately satisfy the gateway without regard to a different/higher gateway requirement under an entirely separate plan.

Does any one see a flaw in this approach? (Don't count the additional cost of administering two separate plans a "flaw".)

While we're at it: Would it be possible for one of the 2 plans to implement a 401(k) Safe Harbor election, and the other not? (I know catchup contributions require universal availability. But is there a universality requirement for safe harbor treatment in separate plans of a single employer, whren each plan passes all testing separately?)

Thanks for the feedback.

[Tom Poje]

in your example, the plans pass ratio% at 100%, so coverage passes. therefore you would not have to aggregate for nondiscrim testing. thus each plan would only need to satisfy gateway on its own.

figuring a worse case scenario (an NHCE with comp at 90,000 getting 3% in the one plan) an additional 2% to that person would be 1,800. Though you said don't count the extra cost of a second plan, I don't see how you can not consider that. most likely the amount would probably closer to half of that.

If you can run, process, file ,etc plan for that much then I suppose it could be worth it.

Same concept applies to safe harbor - if you don't aggregate for coverage, then you would not aggreagte for ADP testing. each plan stands on its own. therefore there is no requirement that each plan be a safe harbor.

[AndyH]

Interesting question.

Another way to look at it is that only those "benefitting under the plan" get the gateway, and if you are testing one of the plans alone the other all are considered to not benefit, i.e. have 0% EBARS. This same concept applies in restructuring or component plan testing, i.e. the other component all is treated as 0%'s.

Now the only catch is that you cannot restructure to avoid the gateway. Isn't that exactly what you are doing, albeit you have two physical plans? How would this be different than restructuring one plan into component plans to avoid the gateway?

[Tom Poje]

Andy -

I think the difference is that you are not 'restructuring', but rather using the rules of permissive aggregation when you have more than one plan.

You wouldn't be able to do that in a single plan.

still, that seems like a more expensive time consuming way to avoid providing the gateway, but it sounds like it would be possible.

of course, I could always be wrong in setting up something like this.

[Belgarath]

Maybe they think the extra 6% to the HC is worth the extra cost to administer a separate plan?

And maybe it is...philosophically I'm in Tom's camp, but I suppose if I were the employer, and someone came up with a legal way for me to get an extra 13,000 in my account by spending a thousand bucks to administer a separate plan, I might listen.

[AndyH]

I agree with each of you but there could be a similar situation with a larger magnitude that might make it worthwhile. And I go back to the concept that what you could do in multiple plans should be doable in one plan. Reverse that logic and you have avoided the gateway by restructuring, which runs contrary to the regulation. I suppose that if you don't need them for 410(b) then you could exclude them by class anyways.

But still this seems like evasion.

[Tom Poje]

ah, if one looks hard enough...

ERISA Outline Book 9.124 (2005 edition)

Chapter 9 Section IX 4.a.2.

oh wait, I penciled that in myself...just kidding, it is really in there.

Belgareth:

I could have had a couple of classes in plan 1

HCE 1 at 15%

HCE 2 at 9%

2 NHCEs at 5%

so it cost me an extra 2% on one of the NHCEs to avoid the second plan and give the HCE an extra 6%

[Belgarath]

Ah, got it now. Thanks. I was missing the point.

[ERISA1]

Thank you all for your thoughtful replies. I kept the facts simple in my example. The actual case involves 10 HCEs and 180 NHCE's. The 2 shareholder HCEs want to get more than the 9% the are currently getting in the big plan. You can imagine that the gateway cost for 180 NHCE would be a whole lot more than it would be for around 30 NHCEs in a second plan.

It does seem odd that you can do through two plans what you cannot do by restructuring a single plan. Back in the 70's, IRS used to speak of the "telescoping rule". That is, if you telescope down all of the separate transactions, would it result in an otherwise prohibited outcome. I've not heard anyone use the term "telescoping" since the 70's.

Being risk averse, I suspect I'll submit to IRS with a schedule Q. The odd thing, I suppose, is that I would end up submitting the larger plan for the D Ltr, since that is the one with exposure to a gateway problem.

Again, thanks very much. I hope ya'll feel free to keep posting if other thoughts come to mind.

[Tom Poje]

With lots of ees I guess that makes sense.

The example in the ERSIA Outline Book was with clearly defined classes - Hourly and salaried.

I'd hate to think how you would operate 2 plans under a 'pick and choose' who is in what plan.

hopefully that is not what you have.

[AndyH]

Just came across an analysis from a very well respected law firm that is on point here and I don't understand the conclusion. Hope ERISA1 didn't write it!

Sponsor has two plans, each covering the same employees. Allocations are discretionary per person. Employer gives allocations to 50% of HCEs and NHCEs in each plan, so 50% do not benefit in each plan.

The plans are not aggregated for testing and separately satisfy coverage.

Assume that the gateway might be 2% (based on 6% to HCEs) in one plan and 5% (based upon 20% in the other).

The analysis says this design does not satisfy the gateway requirement because eligible NHCEs employees are not receiving allocations.

Opinions?

[Blinky the 3-eyed Fish]

Disagree.

[ERISA1]

Thanks for thinking that I might be writing for a prestigious law firm. I used to work with Mand Marblestone & Danziger. Since July, 2005, I've been operating my own prestigious firm.

I wonder whether there's something in the article that would cause it to be distinguishable from the scenario I originally posited. You descibe both plans as covering all employees. That may change the 'testing group' to require; e.g., aggregated testing for top heavy purposes.

I hope you'll go back to the author and ask for clarification. I posted my question originally because I wasn't positive two fully inuslated plans of the same employer would guarantee separate Gateway treatment. I still do believe that the plans should stand alone - for Gateway, and for Top Heavy, purposes.

[AndyH]

That seems to be the main point, that each plan covers all employees, but that only some get allocations. Your top heavy point is interesting.

It is an elaborate private memo that the recipient showed to us, so I don't know if followup will be an option. It gives me pause; I'm seeing telescopes.