Cross Tested PS Plan with 401(k) deferrals

[Guest KAGrist]

I am working on a cross-tested plan that has 8 HCE's. One of which terminated with less than 500 hours worked, and thus will not receive a profit sharing contribution. However, the term'd HCE did make deferrals during the year.

I believe this HCE should be excluded from rate group testing because he did not meet the conditions for an allocation.

However, I need to proceed on to the average benefits test. This term'd HCE did make deferrals, so must we calculate his average benefit ratio and include him in the test? It actually helps the test if I include him, but I need to make sure I'm supposed to include him because without him in the test fails.

Thanks in advance for your help!

KAG

[Tom Poje]

Avg ben % test is independent of the rate group test, so yes, the ee who could defer is included in that test.

by the way, 1.410(b)-6(f)(2) says terminees with less than 500 hours who do not benefit 'may' be excluded.

you could actually include him in the rate group testing as well, provided you treat all terminees the same way.

[Guest KAGrist]

Thank you Tom.

Just to follow, up...

Additionally, I found that the plan was failing the ADP test. So, I've disaggregated 4 NHC's that didn't meet 21 & 1 yr of service (otherwise excludables) and got the ADP test to pass.

Is it necessary then to pull the 4 NHC's out of the cross testing as well, and test them seperately? It still passes 401(a)(4) either way.

KAG

[Tom Poje]

my understanding is as follows:

you have 3 coverage tests

401k

401m

nonelective

you have 3 corresponding nondiscrim tests

ADP

ACP

a(4) or what most people call 'cross tested' (though it could be done on an allocation basis.

anyway, my understanding is each situation could be tested differently (one could use otherwise excludable, while another didn't) as long as you are consistent between coverage and the corresponding nondiscrim test.

(somewhat similar to the idea that you could run an ADP test on current year and the ACP on prior year.)