ADP/ACP Testing for two 401(k) Plans in single controlled group

[7806akp]

A controlled group consists of a parent (Company A) and subsidiary organization (Company B). Each entity has its own 401(k) plan. Employees of Company A are eligible to participate only in the Company A Plan and employees of Company B are eligible to participate only in the Company B Plan. Company A Plan provides richer benefits than Company B Plan. Is it correct to count only Company A employees as eligible employees when running the ADP and ACP tests for the Company A Plan and only Company B employees as eligible employees when running the tests for the Company B Plan? In other words, assuming the two plans separately satisfy the minimum coverage test, is it correct to assume that exclusion of Company B employees from eligibility in the richer Company A Plan should not affect Company A Plan's ability to pass the ADP/ACP tests? In addition, is there any reason why these two plans might be considered one plan for testing purposes (i.e., mandatory aggregation)?

[J Simmons]

A controlled group consists of a parent (Company A) and subsidiary organization (Company B). Each entity has its own 401(k) plan. Employees of Company A are eligible to participate only in the Company A Plan and employees of Company B are eligible to participate only in the Company B Plan. Company A Plan provides richer benefits than Company B Plan. Is it correct to count only Company A employees as eligible employees when running the ADP and ACP tests for the Company A Plan and only Company B employees as eligible employees when running the tests for the Company B Plan? In other words, assuming the two plans separately satisfy the minimum coverage test, is it correct to assume that exclusion of Company B employees from eligibility in the richer Company A Plan should not affect Company A Plan's ability to pass the ADP/ACP tests?

Yes.

In addition, is there any reason why these two plans might be considered one plan for testing purposes (i.e., mandatory aggregation)?

No. However, if an HCE happens to be eligible for both A's and B's plans, then you must aggregate his elective deferrals and count the aggregate in the ADP/ACP testing of each plan. IRC § 401(k)(3)(A) and Treas. Reg. § 1.401(k)-2(a)(3)(ii).

[Tom Poje]

if it was necessary to use the avg ben % test then yes you would count all, but for that test only

[K2retire]

If the plans don't pass coverage separately, and the company with the lower match formula has no HCEs, what additional testing is required?

[Tom Poje]

lets suppose Plan A 1 HCE 5 NHCE 100% match

Plan B 10 NHCE only 50% match

when looking at plan A, how many NHCE receive at least 100% match?

33%. number of HCEs = 100%

at 33% do you pass BRF?

[K2retire]

Obviously not. But what do you do about it? And if the numbers were different so that it did pass BRF, are you required to do a general test?

[Tom Poje]

under 1.401(a)(4)-11(g)(3)(vii)(B) correction for rate of match - additional contributions can be treated for rate of match but not for other amounts testing (I guess that means ACP test)

.......

The example I used was for number purposes only. at 33% for the ratio test, its still not certain whether plan passes or fails. if there was only 1 HCE then it would probably pass the nondiscrim classification test, but I'm too dang lazy to look up the numbers for a question like this. In addiiton, BRF testing there is no avg ben pct test.

The general test only applies to nonelective contributions, not to match or deferral

[K2retire]

Thanks Tom.

[elmobob14]

On a related question, how do you test employees that switch back and forth between the two plans within the same year?

[elmobob14]

On a related question, how do you test employees that switch back and forth between the two plans within the same year?

Sorry, it looks like Simmons answered the question above. Thanks for the cite!

[QDROphile]

Read that answer very carefully. Make sure you read the regulation to determine scope.