Otherwise Excludable Employees

[Guest Rutager]

I have a safe harbor non-elective 401(k) plan - and unfortunately the owner of the company has a son who is only 20 years old and is eligible for the plan. The son contributes to the 401(k) and is eligible for the 3% safe harbor non-elective contribution - which on its own accord kills the rate group testing when I cross test becuase of his age in relation to all other employees - he is by far the youngest.

I think I can tset him as an otherwise excludable (OE) employee - he is only 20. But I also have one NHC employee I have to move into OE group. I can then run seperate testing on the employees who meet the statutory requirements and a test on the OE employees.

My question - Can I cross test the group with the statutory employees and then choose to test the OE group on a contribution basis? My volume submitter doc. does not prescribe a specific testing method. So by regulation can I test the groups different ways?

[Tom Poje]

that should be possible.

In fact, that is the common strategy when a plan is broken up into component testing, with one part being tested on an allocation basis, and the remainder on an accrual basis.

[AndyH]

[Tom, I had not seen your comment when I responded below]

Yes. You are doing something similar to , but not identical to, "restructuring and component plan testing".

Under typical restructuring, you select different people and put them into different groups. And you can test some one way and some others another way. The critical point is that each group needs to pass both coverage and non-discrimination. I wonder how your "otherwise excludable" group would pass coverage.

Doing it your way would only produce slightly different results than typical restructuring, in that the otherwise excludables would not be in the 401(a)(4) test for the statutory eligibles at all, whereas under typical restructuring they would be in the denominator of the NCE "rate group" test and also in the ABPT.

[Guest Rutager]

It would pass coverage becuase I only have two employees in the OE group - one is an HCE (the owner's son) and the other is an NHCE. Both are getting their safe harbor non-elective - so from a coveage standpoint they both benefit. So I have no trouble with 410(b). However, to pass 401(a)(4) on this compenent of the plan I need to pass the general test on a contribution basis - it won't pass cross testing because the HCE is so young.

Thanks for your comments - much appreciated.

[AndyH]

How many NHCEs and HCEs are in the statutory group, i.e. what is the ratio/percentage of the otherwise excludables?

The solution to your problem one way or another is to test the young HCE on a contributions basis along with a sufficient number of NHCEs and to test the others on a benefits basis.