Controlled Group Testing

[Guest Phineas]

A client has 8 different companies comprising of a controlled group. Each company has a separate profit sharing plan, that is, a 401(k) plan without deferrals or matches but with a non-elective employer contribution. The non-elective is given to everyone over 21 and 1 who has worked 1,000 hours and is there on the last day of the year. However, the non-elective is different for each company, a few have 5%, a few have 7.5% and the rest have 10%.

The client's attorney says that since it is a controlled group and they need to perform coverage testing together, that they will also need to perform the General test because of the different levels of contribution. At first thought, I don't agree with the attorney, but want to know if I'm missing something. Each company can pass the coverage test (only 1 company/plan has HCEs/Owners, but it also has NHCEs) on its own, and since they can be disaggregated for coverage testing, wouldn't the employer contribution be regarded as a safe harbor? and the General test not be necessary?

Any insight would be helpful, thanks in advance.

[Mike Preston]

If all is as you say, then you are right and the attorney is wrong.

How sure are you that each plan satisfies 410(b) on its own without aggregating with any other plan?

How sure are you that each plan has provisions which allow it to be treated as a safe-harbor for 401(a)(4) purposes?

[Tom Poje]

put another way, what difference would it matter if you performed (on an allocation basis)

lets use a simple example

Company A 1 NHCE 5% contribution

Company B 3 NHCEs 1 HCE 10% contribution

coverage for B 3/4 NHCE so 75%

now I test the allocation

3 NHCE in the rate group of the HCE, 1 NHCE not, so 3/4 = 75%, passes ratio %

It will always work if you are passing coverage AND the nonelective formula is safe harbor.

[Guest Phineas]

Thank you very much.

The big plan (i.e., the one with the HCEs) has 15 HCEs and 165 NHCEs and all the other plans combined have less than 100 NHCEs. My guess is that the attorney is playing it safe, but the reason I'd like to avoid the General is that it comes with a fee and I'd like to save them some money if at all possible. Thanks, again.

[Mike Preston]

I repeat: how sure are you that the plan with the HCE's passes coverage on its own? It certainly sounds like it does, but since it is a simple matter to lay out the exact number of NHCE's in each group, and you haven't, that tells me that you don't really have a handle on everything. If that is so, then the attorney is doing what he or she should in ensuring the client's interests are protected.

Have you done an average benefits test? If so, and it passes (as it most likely would) then your numbers make it highly, highly unlikely to have a failed 410(b) test on the plan with the HCE's. I'd be very curious how many people terminated during the year (and therefore did not receive an allocation) with more than 500 hours, and who therefore are not excludable.

I'd also be interested in knowing just how many we are talking about that you describe as "less than 100". 99? 17?

In any event, if you can show that the the plan definitively passes 410(b), the attorney should drop his or her request for a general test, assuming the benefit structure is as you say.

[Tom Poje]

or put another way

it was indicated there were 8 companies. one has 165 NHCE and 15 hces

lets suppose the other 7 companies each hasve 71 NHCEs in total

so you would have a total of 71 NHCEs NHCEs not benefiting at the one company.

so now you have 242 total NHCE.

so 165 / 236 = 69.9% so it would fail ratio % test

Mike an actuary so he can 'make' the numbers be whatever you want them to be, or at least that is my understanding of actuaries.

[Mike Preston]

Would that it were.