Two Plans and General testing

[Dougsbpc]

We have administered a cross-tested profit sharing plan for a small employer for several years. In 2005, they adopted a safe harbor 401(k) plan through their payroll provider without telling us. They still want the cross-tested allocation so we will need to test accross both plans.

Question: The safe harbor 401(k) plan does not restrict HCE's to the top 20% but our plan does. Which definition should be used when testing accross both plans?

Thanks much.

[rcline46]

It is required that ALL plans of the employer use the SAME rule on the Top Paid Group.

It is not required in a SH 401k plan to give the SH contribution to the HCEs. What choice was made in the plan regarding that? If the plan does not give the SH to HCEs, and you then change the TPG definition, one could argue that by reclassifying some HCEs and NCEs in order to give them a better contribution, the change is discriminatory.

Is anyone affected by the TPG definition?

Suggest your client hire the proverbial ERISA attorney ASAP and file suit against the payroll company for malpractice. SUbmit to the IRS. Don't make a contribution for 2005 because of plan problems.

[Dougsbpc]

rcline,

Thanks for the reply.

The SH 401(k) does provide SH contributions to HCE's. It is the top paid group rule in our plan that has permitted 8% of pay contributions to NHCE's rather than 20% in past years. Perhaps we could amend our plan by the initial filing deadline to remove the top 20% rule. That would be more beneficial to NHCE's and both plans would be using the same rule. The HCE's would just have to provide more this year and chalk it up to the bone-headed move of having the payroll company administer a second plan.