Calculation of an ADR

[Guest Grumpy456]

Big Corp. owns 100% of Small Corp. Small Corp. sponsors a 401(k) plan. Big Corp. does not sponsor a retirement plan of any type. Mary is employed by both companies. She is paid $100,000 a year from Big Corp. and is paid $15,000 a year from Small Corp. She defers the enter $15,000 she receives from Small Corp. into the 401(k) plan.

Is Mary a Small Corp. HCE? I think the answer is "yes" if her combined pay exceeds the applicable HCE pay threshold. Let's assume it does.

Is Mary's ADR in the Small Corp. 401(k) plan (1) 100% (i.e., $15,000/$15,000) or (2) 13% (i.e., $15,000/$115,000)?

A colleague directed me to Code Sec. 414(b) and showed me that there is no reference in that Code Section to Code Sec. 414(s). He has concluded, as a result, that Mary's ADR in the Small Corp. 401(k) plan is 100%. He would also conclude that since Code Sec. 414(b) does not reference Code Sec. 414(q) that Mary is not an HCE with Small Corp.

I am not satisfied with these two answers although I can understand his logic. Any thoughts? My inclination is that Mary is an HCE and that her ADR in the Small Corp. 401(k) plan is 13%. I need something to back-up my inclination, though. Any help would be appreciated!!!

[rcline46]

No need to reference 414(s). It is a parent-sub controlled group, and it is treated as ONE EMPLOYER. So all pay with the EMPLOYER is counted.

[Guest dbvail]

And of course the plan or plans of both BIG and SMALL are to be tested as one. This could grow to be a very interesting thread. How big is BIG Corp? If huge, no problem, but if modest, the addition of Mary may have an interesting effect on the other HCE's of BIG. Just thinking....

[Guest Grumpy456]

Thanks for your comments. Let me add another layer if I may do so. Suppose that Big Corp. is a not-for-profit hospital which sponsors a 403(b) plan and that Small Corp. is a for-profit physician group that sponsors, like I said, a 401(k) plan.

If Mary has made elective deferrals to Big Corp.'s 403(b) plan and received matching contributions on those deferrals, I have two follow-up questions:

1. Are the deferrals Mary has made to the 403(b) plan, since she is an HCE, taken into account in performing the ADP test with respect to the 401(k) plan?

2. Are the matching contributions Mary receives in the 403(b) plan taken into account in performing the ACP test with respect to the 401(k) plan? Or vice versa with respect to the 403(b)'s ADP test?

Thanks!

[TLGeer]

Thanks for your comments. Let me add another layer if I may do so. Suppose that Big Corp. is a not-for-profit hospital which sponsors a 403(b) plan and that Small Corp. is a for-profit physician group that sponsors, like I said, a 401(k) plan.

If Mary has made elective deferrals to Big Corp.'s 403(b) plan and received matching contributions on those deferrals, I have two follow-up questions:

1. Are the deferrals Mary has made to the 403(b) plan, since she is an HCE, taken into account in performing the ADP test with respect to the 401(k) plan?

2. Are the matching contributions Mary receives in the 403(b) plan taken into account in performing the ACP test with respect to the 401(k) plan? Or vice versa with respect to the 403(b)'s ADP test?

Thanks!

1-No. The plans cannot be aggregated absent some control relationship. I am assuming that the hospital board and the ownership of the physician group do not overlap too much.

2-Same answer.

More interesting would be if the 401(k) and the 403(b) were both sponsored by the hospital.

Tom Geer

[Guest Grumpy456]

Actually, the hospital (Big Corp.) owns 100% of the stock of the physician practice (Small Corp.). Since not-for-profits generally don't have stock, a proxy for stock ownership with respect to a not-for-profit is control of its board. In this case, whether Small Corp. or any other entity has control of the hospital's board is irrelevant, I think. The only question is whether there is any special rule that says that a not-for-profit can own 100% of the stock of a for-profit business without creating a parent-subsidiary controlled group--I am unaware of any such rule. Do you know of one?

Practically speaking, this is the same as saying that the hospital sponsors both a 403(b) plan and a 401(k) plan. What then? The 403(b) plan is exempt from the ADP test, but not from the ACP test. Can/should the 403(b) plan be aggregated with the 401(k) plan at least with respect to the HCEs who participate in both plans? If so, based on what rule? Can someone give me a citation to something concrete?

Thanks!!!