testing 2 profit sharing allocations in the same plan

[Santo Gold]

A 401(k) plan has a non elective company contribution (fixed percentage of pay) that goes to all eligible employees. In addition to that, there is an additional company nonelective contribution that is allocated weighted for service and compensation.

When testing for 410(b) and 401(a)(4), can/should both contributions be combined, or must each separate allocation method pass each test on its own? Does the answer change if the eligible group of employees who receive these 2 separate contributions differ?

[Blinky the 3-eyed Fish]

Combined. No. Have help?

[KJohnson]

Here is the 401(a)(4) reg on when mulitple formulas will fall within a 401(a)(4) safe harbor. I assume that you are not looking to fall within a safe harbor.

(vi) Multiple formulas--(A) General rule. The plan provides that an

employee's allocation under the plan is the greater of the allocations

determined under two or more formulas, or is the sum of the allocations

determined under two or more formulas. This paragraph (b)(4)(vi) does

not apply to a plan unless each of the formulas under the plan satisfies

the requirements of paragraph (b)(4)(vi) (B) through (D) of this

section.

(B) Sole formulas. The formulas must be the only formulas under the

plan.

© Separate testing. Each of the formulas must separately satisfy

this paragraph (b). A formula that is available solely to some or all

NHCEs is deemed to satisfy this paragraph (b)(4)(vi)©.

(D) Availability--(1) General rule. All of the formulas must be

available on the same terms to all employees

[Santo Gold]

Here is the 401(a)(4) reg on when mulitple formulas will fall within a 401(a)(4) safe harbor. I assume that you are not looking to fall within a safe harbor.

(vi) Multiple formulas--(A) General rule. The plan provides that an

employee's allocation under the plan is the greater of the allocations

determined under two or more formulas, or is the sum of the allocations

determined under two or more formulas. This paragraph (b)(4)(vi) does

not apply to a plan unless each of the formulas under the plan satisfies

the requirements of paragraph (b)(4)(vi) (B) through (D) of this

section.

(B) Sole formulas. The formulas must be the only formulas under the

plan.

© Separate testing. Each of the formulas must separately satisfy

this paragraph (b). A formula that is available solely to some or all

NHCEs is deemed to satisfy this paragraph (b)(4)(vi)©.

(D) Availability--(1) General rule. All of the formulas must be

available on the same terms to all employees

Correct, I do not think I am going to satisfy the safe harbor with the service weighted allocation. Therefore, when performing the 401(a)(4) test, should/can I combine both allocations? It would probably be beneficial to do so, since the flat percentage of pay allocation would help.

[JAY21]

Any chance the formula was intended to be a Safe Harbor plan with uniform points allocation (Treas. Reg. 1.401(a)(4)-2(b)(3). Now maybe with multiple formulas maybe it's not "safe-habor" but as aforementioned if each formula passes 410(b) coverage maybe you don't have to do any further (a)(4) testing if it is a safe-harbor uniform points allocation

[AndyH]

I'm not so sure about this. The two nonelectives must first be combined if this is within one plan and these are all nonunion people. There is a gateway problem here. Remember you cannot restructure for purposes of satisfying the gateway. The 2001 regulations provide some rules covering this type of thing that perhaps Blinky or someone else has memorized but I do not. I just know they exist.

(I am assuming that the 3/1 or 5% gateway is not being satisfied and the alternatives are being explored).

[JAY21]

Andy, would you have a gateway issue if each formula was a safe-harbor formula structure other than the multiple formula issue, but then each formula individually passes 410(b). I don't know if it passes on this basis, but if it did, you're not using cross-testing so do you still have a gateway issue ?

[AndyH]

No, not unless you are general testing one or the other on a benefits basis. In this situation, it sounds like one of the allocations is tested on a benefits basis like an age weighted PS plan which by itself is ok but with the other allocations runs afoul of the gateway (smoothly increasing at regular intervals). And I think that to separate one formula from the other is restructuring which is prohibited for gateway purposes.

There are a couple of ways around it in the regulation but it would need to be looked at closely.