4-tier integration, 3% SH, cross-test

[chc93]

I have a 4-tier integration for contribution, in addition to a 3% 401(k) safe harbor. I understand that the 3% safe harbor cannot be part of the 1st tier 3% for integration. The 1st, 2nd, and 3rd tiers are the standard integration.

The standard 4th tier is usually pro-rata to compensation (that is, uniform percentage). Then the entire contribution passes 401(a)(4).

But, we have a provision that the 4th tier is cross-tested (Groups A, B, etc). If we do the 4th tier with different percentages to different groups, do we do the 401(a)(4) test on the 4th tier allocation only, or the entire contribution.

We're looking at this since the demographics in some years may not allow a standard cross-test to pass 401(a)(4) at all, and the 4-tier integration will at least give some separation between the principals and the staff (given their respective compensation), even if the 4th tier is limited to a straight pro-rata (same percentage to all groups).

[Jim Chad]

My understanding is that all non elective has to be tested together. But I am not certain and am looking forward to other replies.

[K2retire]

I agree with Jim.

[buckaroo]

I also agree that the entire contribution should be tested.

I also think that the plan design should be re-examined. I understand that the client would like to increase the benefit to the HCEs, but it would be easier to write it as a new comparability plan and (if the deomgraphics do not work out) basically mirror the integrated allocation.

If the demographics do work out, it could be processed in a fashion more beneficial to the HCEs.

[chc93]

Thanks for all of your replies. I had another thought on this...

Can component plans be used and tested under (a)(4). Assume that a sufficient amount is "contributed" for the first 3 tiers in one component plan. This component should satisfy (a)(4) as an integrated plan. Then, the additional contribution that is "contributed" in the 4th tier becomes another component plan with a cross-tested contribution, and tested under (a)(4). All participants will receive contributions in each component plan, so coverage in each component is not an issue. Can this be done?

Thanks again...

[ak2ary]

No you cannot use component plans

In disaggregating for component plans each participoant has to be assigned to exactly one of the componenets, so you cannot take the first three tiers for everybody and call that component 1 and the last tier and call that component 2 because some employees will be in both components.

You must test the whole contribution as a single allocation..

If you want to divide the people into component plans, you can do that ...but you can't divide the contribution for any employee into two components.

[ak2ary]

You could of course setup two plans....

[chc93]

No you cannot use component plans

In disaggregating for component plans each participoant has to be assigned to exactly one of the componenets, so you cannot take the first three tiers for everybody and call that component 1 and the last tier and call that component 2 because some employees will be in both components.

You must test the whole contribution as a single allocation..

If you want to divide the people into component plans, you can do that ...but you can't divide the contribution for any employee into two components.

Good point. Thank you very much.