Coverage Testing for 401k and 403b

[dmb]

A non-profit prospect currently has a 401k plan with match and employer base contribution (flat allocation). over 500 participants of which 7 are HCEs. Plan almost always fails ADP, but employer does not want to go Safe Harbor route.

Is it possible to amend the 401k plan to exclude HCEs and set up a new 403b plan that excludes all except HCEs?? the new 403b plan would have the same match and base as the 401k plan. Would this solve the ADP failure and be legit from a coverage test standpoint??

All thoughts are greatly appreciated.

[Kevin C]

You can amend to exclude the HCE's from the 401(k). The 403(b) can exclude everyone eligible to defer in the 401(k) [see 1.403(b)-5(b)(4)(ii)(B)]. If the 401(k) has immediate eligibility for deferrals and no other exclusions, that would only be the HCE's. If the 401(k) has age and/or service requirements for deferrals, new employees must be eligible for the 403(b) until they are eligible to defer in the 401(k).

For the employer contributions, the 403(b) will fail coverage, so I would expect you to be aggregating with the 401(k) for coverage and ACP testing.

Another option might be to terminate the 401(k) and put everyone in a 403(b). This is one of those cases where it would be nice be able to merge a 401(k) into a 403(b), but unfortunately it can not be done. Freezing the 401(k) and putting everyone in a 403(b) would likely be cost prohibitive because both plans would need audits.

[ETA Consulting LLC]

I deleted a previous post with incorrect information. I was, orginally, under the impression that the other arrangement would need to be an eligible deferred compensation arrangement under 457(b) for the exclusion (as outlined in the Code). The Regs, however, do provide for an exclusion for those who are eligible to defer to a 401(k).

Thanks Kevin C!