SH 401k and Component Plans

[WhoLetTheDogsOut]

An employer has a safe harbor (3% nonelective) 401(k) which allocates additional nonelective contributions utlizing a grouping methodology.

There are 3 HCEs and 6 NHCEs. All NHCEs receive the 3% SH nonelective plus an additional 2% of pay allocation.

If I put 1 HCE and 2 NHCEs in Component Plan A and the remaining 2 HCEs and 4 remaining NHCEs in Component Plan B, both component plans satisfy the 410(b) ratio % test.

Component Plan A satisfies the 401(a)(4) Average Benefits Test and Component Plan B satisfies 401(a)(4) on a contributions basis - the two HCEs in that Component Plan receive NO nonelective contributions -- only deferrals are allocated to their accounts.

Am I missing anything?

[ETA Consulting LLC]

Off the bat, when you use component plan and average benefits test in the same sentence, you're missing something. The average benefits test negates the component plan methodology for passing 410(b) as you must test ALL plans of the employer together.

Good Luck!

[John Feldt ERPA CPC QPA]

If, by average benefits test, you mean test on a benefits basis or cross-test, then you just need to make sure all NHCEs get the gateway and if top heavy, that the non-keys all get a top heavy minimum.

[WhoLetTheDogsOut]

If, by average benefits test, you mean test on a benefits basis or cross-test, then you just need to make sure all NHCEs get the gateway and if top heavy, that the non-keys all get a top heavy minimum.

Yes, I meant cross testing on a benefits basis. The plan satisfies 410(b) as a whole by the ratio % test, all NHCEs get the gateway (5%) and all non-keys get a top heavy minimum. Does that make more sense? Thank you.

[Mike Preston]

I don't think the 4 NHCE's in component plan B require gateway. From where I sit, component plan B satisfies 410(b) and 401(a)(4) on its own as does component plan A.

[Tom Poje]

1.401(a)(4)-9©(3)(ii) states that the min aggregate gateway cannot be satisfied on the basis of component plans.

my understanding of that is before you even consider cross testing (e.g. in this case splitting the plan into component plans) the plan as a whole has to satisfy the gateway requirements.)

[John Feldt ERPA CPC QPA]

I agree - this sentence in particular from that paragraph:

"In addition, the minimum allocation gateway of §1.401(a)(4)-8(b)(1)(vi) and the minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this section cannot be satisfied on the basis of component plans."

But I'd like to hear Mike's take on this.

[Mike Preston]

No take, just answered a question too late at night. Yes, gateway is determined prior to component test.