95% rule and for-profit entities in a controlled group

[Guest George Chimento]

Sec. 664(a), PL 107-16, 6/7/2001 seems almost too good to be true.

Assume a controlled group includes for-profit and non-profit entities. The 401(k) and (m) plans of the for-profits can exclude all of the employees of the non-profits in a 410 test, provided that (1) 95% of the employees of the for-profits participate in a 401(k) plan which only has an (m) feature, and (2) the non-profit employees participate in a 403(b) program (which only needs to provide for deferals), and (3) none of the non-profit employees participate in the 401(k) and (m) plans.

It seems like a very easy way to discriminate within a controlled group if the for-profit entity employs primarily hce's and has a generous match.

Is it this easy ?

And although the proposed change to regulation Reg §1.410(b)-6(g) is not final yet, the law is retroactive to plan years starting after 1996, so it would seem it can be relied on for past years even though the reg. is not technnically final.

Any thoughts ?

[MWeddell]

Yes, it is that easy. Note that the discrimination would be in the form of a higher match to the for-profit employees. If you give a profit-sharing or other type of employer nonmatching contribution to the for-profit employees, it isn't covered by this year. If you give a high match rate to only a select group of the for-profit employees, you'll have a benefit, right or feature to test, which also will cause a problem.

Without this special rule, controlled groups that used a 403(b) plan for their employees in not-for-profit locations and 401(k) plans for their employees in for-profit locations often had coverage testing challenges with their 401(k) plans.

[gc@chimentowebb.com]

Thanks, Mike

I just wanted to have a sanity check on this.

George