Shifting deferrals to the ACP / 2 different plans

[fiona1]

An employer maintains an ESOP plan as well as a 401(k) plan. Deferrals are made to the 401(k) plan and the ADP test passes. However, the contributions made to the ESOP fail the ACP test. Both plans have the same plan year and they both use the current year testing method.

Can deferrals to the 401(k) plan be shifted to the ACP portion of the ESOP plan? I read through the ERISA Outline book and it didn't describe the situation of 2 separate plans. And there doesn't seem to be any mention of this in the regulations.

Any idea's if this is permissible?

[fiona1]

I've been trying like crazy to find the answer to this. I found the following in 401(m)-2(a)(6):

(iv) Aggregation must be permitted. The plan that provides for employee or matching contributions and the plan or plans to which the qualified nonelective contributions or elective contributions are made are plans that would be permitted to be aggregated under §1.401(m)-1(b)(4). If the plan year of the plan that provides for employee or matching contributions is changed to satisfy the requirement under §1.410(b)-7(d)(5) that aggregated plans have the same plan year, qualified nonelective contributions and elective contributions may be taken into account in the resulting short plan year only if such qualified nonelective and elective contributions could have been taken into account under an ADP test for a plan with that same short plan year.

The Final 401(k) regulations now allow ESOP and non-ESOP plans to be aggregated for ADP/ACP testing.

So if I have a 401(k) plan that passes the ADP test, I'm thinking it's okay to shift deferrals to my ESOP plan that has a 401(m) provision - even though it's a separate plan. I'm interpreting the code section above to say that you can use elective contributions in a 401(m) test as long as the plan they come from can be aggregated with the plan you're shifting them too.

I'm assuming it's rare to shift deferrals from one plan to the ACP test of another plan. But based on what I found above, it looks to be permissible. I just hope it doesn't create any 401(a) issues.

[Tom Poje]

I'm not quite sure if you are really shifting from one plan to another.

you are aggregating plans for coverage, so you must aggregate them for ADP testing.

now, you are allowed (provided the ADP test passes before and after) to use the 'extra' deferrals in the ACP test. nothing has physically happened. you are simply 'moving' numbers on paper.

[fiona1]

Actually, we're not aggregating plans for coverage. Each plan is being tested separatley for coverage. In fact, I don't even think you can aggregate an ESOP and non-ESOP for coverage:

Chapter 8 (Coverage) , Section VII of the EOB:

ESOPs may be aggregated only if: (1) the proportion of qualifying employer securities to total plan assets is substantially the same for each ESOP, and (2) either (i) the qualifying employer securities held by all aggregated ESOPs are of the same class, or (ii) the ratios of each class held to all qualifying employer securities held is substantially the same for each ESOP. See Treas. Reg. §54.4975-11(e)(2).

Chapter 11 (ADP/ACP) of the EOB:

1.a.1) ESOPs and non-ESOPs. Although ESOPs and non-ESOPs are generally not eligible

for aggregation, the regulations published on December 29, 2004, permit aggregation of ESOPs

and non-ESOPs solely for purposes of ADP and ACP testing. See the discussion in Part C of this

Section XII. This rule is generally effective for plan years beginning on or after January 1, 2006.

Thus, for pre-2006 plan years, an HCE’s elective deferrals, matching contributions, and

employee contributions to an ESOP and a non-ESOP maintained by the same employer would

not be aggregated, but for post-2005 plan years they would be aggregated.

Since we're not aggregating for coverage, we have an ADP test for our 401(k) and an ACP test for our ESOP. We are not aggregating for ADP/ACP. So I'm just trying to clarify if I can shift in this situation.

[Tom Poje]

so are you saying that you have a 401(k) plan (deferrals only, no match, so no ACP)

and an ESOP (which has no deferrals, but has the match, hence the ACP). hence the question regarding shifting?

hadn't thought about something like that. I have thought about the situation in which an NHCE defers, but quits so gets no match, so doesn't show up on the ACP test. I don't think you could shift that person's deferrals, but I'm not even 100% sure on that.

[fiona1]

so are you saying that you have a 401(k) plan (deferrals only, no match, so no ACP)

and an ESOP (which has no deferrals, but has the match, hence the ACP). hence the question regarding shifting?

That's exactly correct. It appears to me that it's allowable - based on the wording in 401(m)-2(a)(6)(iv), but that's just me.

hadn't thought about something like that. I have thought about the situation in which an NHCE defers, but quits so gets no match, so doesn't show up on the ACP test. I don't think you could shift that person's deferrals, but I'm not even 100% sure on that.

In the situation where a NHCE defers but quits and is not on the ACP test, our interpretation is that we would not shift the deferrals of the terminated NHCE.

[Tom Poje]

without further guidance, I'd agree with your conclusion.

[fiona1]

Thanks Tom...