ADP tests and Top Heavy

[Guest CAG1]

Law firm has one 401(k) plan for Partners & Staff and a separate 401(k) plan for Associates. Partners & Staff plan passes coverage and ADP on a stand alone basis. Associates Plan must be aggregated with Partners & Staff Plan for coverage and nondiscrimination. In order to keep Associates out of the Partner & Staff Plan "required aggregation group" for top heavy purposes (so Associates don't have to get a top heavy minimum contribution), Partners & Staff Plan runs a separate ADP test and passes. However, when a combined ADP test is run, it fails. Does it matter that the Partners & Staff Plan passes ADP separately? Don't the HCEs in the Partners & Staff Plan have to get ADP returns based on the combined test anyway?

[Guest Sieve]

Since the Associates' 401(k) Plan must be permissively aggregated with the Partners & Staff Plan in order for the former to pass coverage, the 2 plans must be combined for ADP testing. (Treas. Reg. Section 1.401(k)-1(b)(4)(iii)(A).)

[Guest CAG1]

Since the Associates' 401(k) Plan must be permissively aggregated with the Partners & Staff Plan in order for the former to pass coverage, the 2 plans must be combined for ADP testing. (Treas. Reg. Section 1.401(k)-1(b)(4)(iii)(A).)

To clarify the question, yes, the Partners & Staff Plan must independently satisfy coverage and nondiscrimination (which it does) to avoid inclusion of the Associates in the top-heavy required aggregation group but must also be aggregated with the Associates Plan for the ADP test. If the Parters & Staff Plan passes ADP on its own, but fails when aggregated with the Associates Plan, the fact that the Partners & Staff Plan passes independently does not prevent the requirement that corrective contributions must be made to HCEs in the Partners & Staff Plan (even though their plan passes on a stand alone basis).

[buckaroo]

I have read the posts and I am still unclear what the question is. If the plans needs to be aggregated to pass coverage, then they need to be aggregated for the ADP/ACP. If they do not pass coverage separately, then they cannot be tested separately for ADP/ACP and it does not matter how the ADP/ACP performs for each individual plan. So, aggregated for coverage, aggregated for ADP/ACP and no ADP/ACP test would be run for each individual plan.

Additionally, you must be careful with the top heavy analysis as well because of the required aggregation for key employees. In other words, if the associates plan has key employees (ownership threshhold or officers), then they will have to be aggregated for top heavy purposes.

[Guest fender5150]

To clarify the question, yes, the Partners & Staff Plan must independently satisfy coverage and nondiscrimination (which it does) to avoid inclusion of the Associates in the top-heavy required aggregation group but must also be aggregated with the Associates Plan for the ADP test. If the Parters & Staff Plan passes ADP on its own, but fails when aggregated with the Associates Plan, the fact that the Partners & Staff Plan passes independently does not prevent the requirement that corrective contributions must be made to HCEs in the Partners & Staff Plan (even though their plan passes on a stand alone basis).

Are you saying the Top Heavy Test can be avoided by passing the ADP/ACP test and the coverage test (separately and combined)? IE: The two plans don't have to be combined for this test? This doesn't sound right, so I may be mis-reading it.

Aside from my comment above, I think you're in good shape for the ADP/ACP test based on the information provided - I mean the segregation sounds logical, so passing the ADP/ACP by testing separately should work. I may be missing something though.

If both plans are safe harbor plans, and not providing NEC's over and above the safe harbor provisions, the Top Heavy Test isn't an issue.

If The Top Heavy test is required, I assume this means the Partners are getting an NEC over and above the Safe Harbor, which means the Gateway Minimum Test is also an issue, right?

If the partners are looking to put obscene amounts of money away (and there's nothing wrong with that), maybe they should consider a non-qualified deferred compensation plan (Actually; you are probably using this and/or other tools for them as well).

[Tom Poje]

for those who are searching for the cite:

t-6 of 1.416-1

What is a required aggregation group (for top heavy)

... each other plan of the employer which, during this period, enables any plan in which a key person participates to meet the requirements of 401(a)(4) or 410 is part of the required aggregation group.

the example that follows cleary indicate if you have to aggregate to pass coverage, then you have to include the plan in the top heavy test.

now, if I understand the thread, it was indicated, the plans can't pass coverage without being aggregated.

but once you aggregate for coverage, you must aggregate for the ADP test.

and then you are also stuck providing the top heavy to the group you didn't want to.

.....

I'm assuming when it was said the plans didn't pass coverage, that meant the ratio % test. I suppose it might be possible to pass using the avg ben test and avoid aggregation, but no data was provided on that.

[Guest Sieve]

I think CAG1 was indicating that the partners plan did not have to be aggregated with the associates plan to test for top heavy because it passed coverage on its own and it passed ADP on its own and it did not need the associates plan to pass any of those tests. That conclusion we all agree with. Then he said the associates plan did not pass coverage on its own, so it had to be aggregated with the partners plan for that purpose. However, I think his mistake was in forgetting that, because the associates plan had to be aggregated with the partners plan for the associates plan to pass 410(b), then top heavy aggregation of both plans is required--even though, when looking solely at the partners plan, no top heavy aggregation was required. And that's true: it is precisely because the asssociates plan does NOT pass 410(b) on its own that top heavy aggregation is required, because, if it does pass 410(b) on its own, neither plan--assuming there are no key employees in the associates plan requiring mandatory aggregation--would be aggregated with the other for purposes of TH.

[buckaroo]

I think there is an additional wrinkle here. When plans are aggregated for coverage, the aggregation for top heavy purposes is not always automatic. Assuming that there are no key employees in the Associates plan, it comes down to which plan is helping which plan to pass coverage. Specifically, if the Partners/Staff plan is helping the Associates plan pass coverage, then the Associate plan does not have to be aggregated for top heavy purposes and the associates do not have to receive any top heavy allocation. However, if the Associates plan is helping the Partner/Staff plan pass coverage then the Partner/Staff Plan must be aggregated with the Associates plan for top heavy purposes and everyone is entitled to the top heavy allocation. 2007 EOB 1.879

[Guest Sieve]

I--& perhaps others--stand corrected; the conclusion in my last post was wrong. The definition of required aggregation group includes (i) a plan with key employees, and (ii) any other plan which is aggregated with that plan in order to pass coverage. (IRC Section 416(g)(2)(A).) Buckaroo is right that if the associates plan has no key employees, its aggregation with the partners plan in order to pass coverage does NOT require aggregation of the plans for TH testing (but still would require aggregation for ADP). It's also in Tripodi 2008, pp 1.1039 - 1.1040.

[Guest CAG1]

I--& perhaps others--stand corrected; the conclusion in my last post was wrong. The definition of required aggregation group includes (i) a plan with key employees, and (ii) any other plan which is aggregated with that plan in order to pass coverage. (IRC Section 416(g)(2)(A).) Buckaroo is right that if the associates plan has no key employees, its aggregation with the partners plan in order to pass coverage does NOT require aggregation of the plans for TH testing (but still would require aggregation for ADP). It's also in Tripodi 2008, pp 1.1039 - 1.1040.

Sal is always my first look after the primary source material! What Sieve said above is exactly the case. Sorry if it didn't come though very clearly. So, to beat the proverbial horse a bit more, any thoughts on who gets returns from a failed aggregated ADP test? My gut says all HCEs included in the aggregated test should be considered in calculating returns. Thanks for the input.

-CAG1 (she)

[Guest Sieve]

CAG1 (she) (sorry ): If I undertstand correctly (& I'm not so sure anymore!), passing ADP for the partners plan (alone) was required in order to keep associates out of TH aggregation. But, combined ADP test also was required, as a result of the aggregation of both plans in order that associates plan could pass 410(b). Seems that ADP returns would be based on the aggregated ADP test, and would include all HCES in that test (although I wonder if anything is as it seems . . .).

- Larry S. (he)

[Guest CAG1]

CAG1 (she) (sorry ): If I undertstand correctly (& I'm not so sure anymore!), passing ADP for the partners plan (alone) was required in order to keep associates out of TH aggregation. But, combined ADP test also was required, as a result of the aggregation of both plans in order that associates plan could pass 410(b). Seems that ADP returns would be based on the aggregated ADP test, and would include all HCES in that test (although I wonder if anything is as it seems . . .).

- Larry S. (he)

No worries Larry! I agree with you. All HCEs included in the aggregated ADP test should be considered in calculating returns to correct the failure. All in favor please say "I"!