2 Plans Not Paaing 410(b)

[Dougsbpc]

Suppose you have two 401(k) plans sponsored by one company. Assume the plans are not top heavy and they have nondiscriminatory classifications.

As far as Employer Contributions:

Plan 1

- Covers all employees hired before xxxx date

- Provides 15% to owners, 5% to all others

Plan 2

- Covers all employees hired after xxxx date

- Provides 2% to all participants

- There are no Key or HCE's in this plan

Our understanding is that as long as both plans pass 401(a)4 and coverage independently, the 5% gateway does not apply to plan 2.

Suppose plan 1 fails 410(b). Is it possible to use ABPT to pass coverage? Or must both plans then be combined, and thus deemed to not pass coverage independently?

Thanks much

[Tom Poje]

to pass coverage a plan must pass eother the ratio % test or the average benefits test.

you indicated plan 1 fails ratio % if the plans are not aggregated.

For the average benefits test you have to pass both

1. average benefits % test

2. nondiscrimination classification test.

the average benefits percentage test includes all contributions, all bodies, etc even if the plans are not aggregated for coverage. (see 1.410(b)-7(e) ...all plans of the employer that could be permissively aggregated...

there is no gateway at this point because you are not testing for nondiscrimination.

[Dougsbpc]

Thanks Tom

This is a takeover plan. We normally don't recommend this aggressive of a plan design as a 5% gateway is very often a good deal for the employer and employees.

As it turns out, this plan may not pass nondiscrimination classification test. When we received a copy of the most recent plan amendment (adopted in 2010) they had each participant as their own group. I believe this would not be considered a reasonable classification per 1.410(b)-4(b) and therefore they not only fail 410(b) but also the average benefits test because of the classification issue.

Do you agree.

[Tom Poje]

well, since the regs state that an enumeration of employees by name or other specific criteria having the same effect as enumeration by name is not reasonable (1.410(b)-4(b)) I would agree with you - in the case of a controlled group in which you are not aggregating the plans it appears you run into problems under the rules.

[Dougsbpc]

It is interesting.

This plan fails the ratio percentage test but passes the average benefits test. The document indicates each participant is in their own group. When the prior administrator was asked how they could have used the average benefits test when they do not have a reasonable classification, they gave a Bill Clinton-like answer. They mentioned that even though the document does not have a reasonable classification, in reality the allocation was such that no participant that could be of a certain class received a different contribution. For example, all the docs received 15%, all the CEO's received 9%, all the part time participants with under 40 hours received 25% etc.

Basically, I did not have an unreasonable classification with respect to that plan, the XXX plan, given that in fact an unreasonable classification did not, in fact, happen!

Maybe they are right.