S/H 401(k) Non Discrim Testing Question

[MarZDoates]

I have a s/h 401(k) plan that uses the 3% non-elective contribution allocated to all participants.

The plan also has a discretionary profit sharing contribution, integrated, allocated only to participants that are employed at the end of the plan year and work 1000 hours.

I have five non-highly compensated employees that were eligible only for the s/h non-elective.

If I am reading the ERISA outline book correctly, it looks like I can re-structure into component plans to pass coverage? Does that mean that I put the 5 participants in one plan, since no hces benefit, it passes coverage? Then put all the other participants in another plan, all ees benefit..passes coverage?

Is is this even necessary? My concern is the discussion about the design based safe harbor status of the plan.....The allocation rates are not uniform in this situation. If I'm reading it right, it's okay as long as the plan passes coverage....is that correct?

Thanks.

[Tom Poje]

it is a false statement to say 'all employees are benefiting' if you split into component plans

lets say I had 10 NHCEs and 1 hce

and I split things into 2 compnent plans

5 nhces and 5 NHCEs and 1 HCE tested on accrual basis.

Now I look at each plan as if it were a separate plan so in one plan you have

5 NHCE benefiting/10 total NHCEs / 1 HCE benefiting / 1 total HCE

that is only 50% so fails ratio % test, might pass avg ben test.

[Mike Preston]

Remember that to use the abt for coverage purposes your component plans must be reasonable classifications. You can't just cherry pick the 5 who didn't benefit from the 10 total and automatically claim eligibility. However, with that said, I know that some people believe that if classification number 1 is "everybody employed at the end of the year" and classification 2 is "everybody not employed at the end of the year" then you would have reasonable classifications. Anybody want to opine on that piece?

[austin3515]

Just because I'm a pension geek, I want to point out that this plan passes coverage because all nonexcludables benefit via the safe harbor.

What the two responders are talking about is ensuring that the plan still satisfies the design based safe harbor (i.e., nondiscrim/401(a)4).

[MarZDoates]

Thanks for the input. I think I understand now. You can pass coverage since participants benefit via the s/h non-elective. The issue then becomes whether or not it passes 401(a)(4) since the plan now won't fall under the design based safe harbor. Does that sound accurate?

[Tom Poje]

yes, if I have understood all you said correctly.

[MarZDoates]

C'mon, Tom.....can't you read my mind????

Thanks again!