2 plans aggregated for coverage, how about 401(a)(4)

[John Feldt ERPA CPC QPA]

Here's an interesting prospect:

Employer has 2 Profit Sharing Plans (no deferral provisions):

Plan 1: Covers only the 1 HCE of the Employer, the document is a vol sub cross-tested doc

Plan 2: Covers all NHCEs (7 or 8 ees), the doc is a NS prototype, allocation is uniform pct of pay

To pass 410 coverage, plan 1 must be aggregated with plan 2 in order to pass (obviously). Then, for plan 1 to pass 401(a)(4) nondiscrimination, the prior TPA ran a cross-tested 401(a)(4) test including the HCE and all NHCEs. The contribution that is then decided upon for Plan 2 is at least equal to either 5% of pay or 1/3 of the pct given to the HCE in plan 1.

1. Doesn't plan 2 need to have gateway language somewhere in order to be in compliance (in form) so the plan can actually support its position that it really gave a "gateway"?

or

2. Is the gateway language somehow not needed in plan 2's doc?

[Mike Preston]

Not needed.

[John Feldt ERPA CPC QPA]

Ok, after reading through some of 1.401(a)(4), I can see that.

Now, suppose the plan covering the HCE contributed 20% of pay for 2005, and the plan covering the NHCEs contributed only 0.00% of pay for 2005.

In this case, the 2005 contribution was actually deposited in 2006, so perhaps that amount can be recharacterized as a 2006 allocation/contribution (plus the 2005 tax return gets amended to show no deduction).

Assuming they have not made any other contributions in 2006 (so the 415 limits are not exceeded), do you see any pitfalls with doing this, or do you see a better solution?

[Mike Preston]

ERISA lawyer time. I seem to recall something that says the employer ends up designating what year a contribution is for predicated on the tax return it shows up on. Once it is designated for 2005, I wouldn't want to be the sole person advising the client that it was "OK" to undesignate it for 2005 and then designate it for 2006.

It may, in fact, work out that way in some circumstances, but I would think opinion of counsel would be invaluable here.

[Guest ronald mexico]

if i have 2 crosstested plans that pass coverage on their own, would i need to use the ebars of the plan 2 when running the general test of the plan 1 (vice versa)? or would the general test of each plan stand alone also?

hopefully i have explained the question clearly enough.

thanks

[Blinky the 3-eyed Fish]

First, I am assuming these are plans of the same employer or related employers. That being said, if you are not aggregating the plans for coverage then you are not aggregating the plans for nondiscrimination. Therefore, when testing plan 1, the EBAR's for the participants of plan 2 are 0 and vice versa. Of course when performing the average benefits test you consider the EBAR's of both groups.

[AndyH]

It should be noted in each case that in order to aggregate for 410(b) and 401(a)(4), the plan years must be the same. If not, the results are as Blinky described regardless of preference.