Aggregating Plans for Coverage

[Laura Harrington]

We are the TPA for a non safe harbor 401(k) plan. The plan sponsor is a member of a controlled group with another entity that sponsors their own 401(k) plan. That plan is a safe harbor match plan. The client asked us to do a projected coverage test to determine if there will be any issues for the 12/31/2009 plan year.

The ratio percentage test for our plan (the non safe harbor plan) will pass.

The ratio percentage test for the other plan fails, miserably.

The solution offered up by the other TPA is to aggregate the two plans for coverage. I don't think this is allowable due to Treas. Reg. 1.401(k)-1(d)(4)(iii)(B):

B) Plans with inconsistent ADP testing methods. Pursuant to paragraph (b)(4)(ii) of this section, a single testing method must apply with respect to all cash or deferred arrangements under a plan. Thus, in applying the permissive aggregation rules of §1.410(b)–7(d), an employer may not aggregate plans (within the meaning of §1.410(b)–7(b)) that apply inconsistent testing methods. For example, a plan (within the meaning of §1.410(b)–7(b)) that applies the current year testing method may not be aggregated with another plan that applies the prior year testing method. Similarly, an employer may not aggregate a plan (within the meaning of §1.410(b)–7(b)) using the ADP safe harbor provisions of section 401(k)(12) and another plan that is using the ADP test of section 401(k)(3).

The other TPA says that the safe harbor plan is just not going to rely on the safe harbor provisions for the 2009 plan year, thus we can aggregate for coverage and do an ADP/ACP test on the combined plans.

I just don't think it is as simple as saying we decided not to rely on the ADP safe harbor provisions for the plan year.

The only thing I could think of is if they say they are going to suspend the safe harbor match for the year and rely on ADP testing. After giving a 30 day notice before suspending the match the other plan would have one payroll before the end of the year.

Any thoughts?

[rcline46]

Dont aggregate until you see the amendment (signed and dated by the sponsor of the other plan) removing the SH match. Tell your client what is happening and why you cannot aggregate.

Note that it is the other plan that is in trouble.

[Laura Harrington]

Dont aggregate until you see the amendment (signed and dated by the sponsor of the other plan) removing the SH match. Tell your client what is happening and why you cannot aggregate.

Note that it is the other plan that is in trouble.

The client is aware of what is happening and wants us "all to get on the same page" which boils down to they want us to agree with the other TPA's solution.

[Tom Poje]

you indicated the other plan fails ratio % miserably, but did not indicate if it passed nondiscrimination classification test (e.g. ratio > safe harbor %) and avg ben pct test. maybe there is still hope.

since the IRS has said "A plan is safe harbor even if you fail to issue the required annual notice"

and

"A plan is safe harbor even if you don't make the contribution within 12 months. you can't revert to testing. you have to come up with the contribution"

"If you provide a notice but fail to amend the plan to be a safe harbor by 12/31, the plan is not a safe harbor, even if you provide a 3% QNEC. The plan would still have to do testing" etc, etc.

I would agree that you can't simply say "we aren't going to rely on the safe harbor and do testing", regardless, the plan is still safe harbor (the notice itself is an indication of such), and as you pointed out, the regs say you can't aggregate a safe harbor and a non safe harbor. [this might be an unintended consequence of the rules, but, unless the other TPA can provide some comment from the IRS indicating otherwise, I would be leary of such a move..

I do like the idea of 'suspending' the safe harbor for what amounts to be one week, and therefore being forced into testing. clever.

[K2retire]

I do like the idea of 'suspending' the safe harbor for what amounts to be one week, and therefore being forced into testing. clever.

The client may not find it so clever when they are reminded that they must deposit the safe harbor contribution for the other 51 weeks.

[Tom Poje]

as I understand it, they want to fund the safe harbor plan anyway. the folks in the safe harbor plan are only losing 1 week of 3% comp, just so you can get around the rules and aggregate the plans for testing.

[Laura Harrington]

as I understand it, they want to fund the safe harbor plan anyway. the folks in the safe harbor plan are only losing 1 week of 3% comp, just so you can get around the rules and aggregate the plans for testing.

The safe harbor 401(k) plan does pass the nondiscriminatory classification test so we suggested to the other TPA that they try passing coverage for the safe harbor 401(k) plan using the average benefits test, but they think this other route is the better solution.

[Guest Sieve]

Laura --

This is an obvious question, and therefore may have been overlooked (as often happens with obvious questions)--but I assume the controlled group is not within its Section 410(b)(6)© transitional period, correct?

If there's no paydate during the plan year which falls after the 30-day notice/amendment period expires, then I assume this process will not work (since there is no match which is being suspended). So, if this is a calendar year plan, good luck!