Must Two Plans be Treated as One?

[Dougsbpc]

Suppose you have two 401(k) plans sponsored by one company (no QSLOB exists). 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

It is our understanding that the 5% gateway would not have to be provided under plan 2 as long as each plan passes 401(a)(4) and 401(b) independently.

Plan 2 passes both independently. Plan I will pass 401(a)(4) independently but requires the average benefit percentage test to pass coverage. Per 1.410(b)-7(e) all plans that could be permissively aggregated under paragraph (d) must be aggregated for this purpose. Paragraph (d) last paragraph indicates "if an employer treats two or more separate plans as a single plan under this paragraph, the plans must be treated as a single plan for all purposes under section 401(a)(4) and 410(b)".

Does this mean that you must treat both plans as one for 401(a)(4) and 410(b) just because one plan needed the average benefits percentage test to pass coverage?

Thanks.

[Tom Poje]

Question 44 at the 2009 ASPPA Conference:

Based on the facts below, does the profit sharing allocation have to

meet the gateway requirements of the final comparability

regulations? A profit sharing contribution is allocated to a select

group of employees using an integrated points allocation formula

that requires a general nondiscrimination test under IRC §401(a)(4).

The rates used in the rate group test were calculated using

contribution rates, and the ratio percentages of all rate groups met

the nondiscriminatory classification percentage.

The average benefit percentage test did not pass using contribution

rates, but did pass when tested using equivalent benefit accrual

rates.

Do the gateway requirements apply to this allocation because the

average benefit percentage test was done based on equivalent

benefit accrual rates?

IRS Response: No. There is no gateway requirement for a general tested plan under Treas. Reg.

§1.410(b)-5(d)(5), unless cross-testing is used to determine the rate group testing.

The gateway rules are in §1.401(a)(4)-8(b)(1)(I).

In other words, the gateway is required when you get to nondiscrimination testing not coverage.

[chc93]

In other words, the gateway is required when you get to nondiscrimination testing not coverage.

Tom... to continue the question for myself... if you have to use ABPT for 410b coverage (and having to aggregate both plans for this), does Plan 1 and Plan 2 have to also be aggregated when doing the nondiscrimination testing. Put another way... since Plan 1 satisfies 410b coverage using ABPT (with both plans aggregated), can Plan 1 then be tested for nondiscrimination without regard to Plan 2. Or am I missing the "for all purposes" clause. Thanks...

[Tom Poje]

perhaps the easiest way to see things is as follows:

1.410(b)-5 (the avg ben percentage test rules)

(d)(5)(ii) explains the rules to determine the avg ben pct for plan with different plan years

1.410(b)-7 (disaggregating and aggregating plans)

(d)(5) 2 or more plan may not be aggregated unless they have the same plan years.

in other words you have to aggregate all for the avg ben pct test (even if you have different plan years)

but once that is done you can't aggregate even if you want to aggregate if you have different plan years.

.......

by the way, if the plan has failsafe language, then you never get to the avg ben pct test for purposes of coverage.

[chc93]

Tom... thank you again. I'm still not fully grasping all of this. Can you please comment on the following. Both plans are calendar year. No fail-safe coverage in plans.

Plan A - 401k SH/PS Plan - directors,staff with associates getting zero

--10 HCE, 25 NHCE

--1 year eligibility, dual entry

Plan B - 401k Plan - only staff and associates

--0 HCE, 37 NHCE

--immediate eligibility, immediate entry

Plan B passes ratio coverage. Plan A fails ratio coverage. Plan A passes ABT for coverage when aggregating Plans A and B (reasonable classification, nondiscriminatory classification, ABPT).

Now, when I do the cross-testing for nondiscrimination for Plan A, is my NHCE's 25 (ignoring Plan B) or am I forced to use 37 (since I aggregated Plans A and B for ABT for coverage).

But I also think that if I'm forced to use 37 NHCE's when cross-testing Plan A, I can also disaggregate the otherwise excludable employees (less than 1 year of service), in which case I'm back to using 25 NHCE's for Plan A cross-testing?

Do I have this right?

[Tom Poje]

my understanding is you have run your avg ben pct test for coverage (and passed).

if disagregated the 'ratio test' is based on the people in B treated as includable and not benefiting, but you are not trying to pass the 70% but the safe harbor % because you are using the avg ben test rules.

for nondiscrim, the avg ben pct test is exactly the same so nothing more need to be done in that area.

now, if plans are disaggregated, you would look at A only, but the people from B are included as 0

..........................

or you could aggreagte them and then anyone who received a nonelective gets the gateway. (But then that changes you coverage test because you have to follow the same rules - if you aggregate for coverage you aggregate for nondiscrim and vice versa)

but just because you test everyone for the avg ben pct test does not mean you are aggregating the plans, it just means the regs say for that test and that test alone you test all together.

or you could aggregate the plans, but then test the otherwise excludables separately. assuming there are no HCEs in that group there is no nondoscrim test so no gateway would be necessary for that group.

of course all that is assuming I am inderstanding the facts correctly (and the regs as well)

[Dougsbpc]

Tom thanks for your take on this.

for nondiscrim, the avg ben pct test is exactly the same so nothing more need to be done in that area.

now, if plans are disaggregated, you would look at A only, but the people from B are included as 0

So if aggregation is not chosen for testing plan A:

1. Plan A needs to use ABPT to pass coverage. By definition, this requires consideration of all contributions of all participants from all plans. This does not mean aggregation was chosen, since aggregation is required. Coverage passed.

2. Next, when testing for nondiscrimination, the ABPT is exactly the same as in #1 above. Rate group test includes accrual rates for all employees who would meet min age and service. Plan A participants who received a nonelective contribution with positive accrual rates, and plan B participants who did not benefit under plan A with 0 accrual rates.

Is this correct?

[chc93]

for nondiscrim, the avg ben pct test is exactly the same so nothing more need to be done in that area.

now, if plans are disaggregated, you would look at A only, but the people from B are included as 0

Tom... many thanks again. I think I've got it. In my case, I do not want to aggregate A and B for nondiscrimination, but since I had to use the ABT for coverage, I was concerned that that forced me into aggregating A and B for nondiscrimination. So, it looks like I can use ABT for coverage for Plan A, but test Plan A for nondiscrimination without aggregating with Plan B. That's the result I wanted.

But your quote by Doug above seems to contradict my understanding. Maybe I'm still confused.

[Tom Poje]

just to make sure

there is generally one and only 1 Avg Ben Pct Test using everyone whether yo aggregate or don't aggregate any or all plans of the employer.

there could be 2 avg ben pct test if you choose to test otherwise excludable employees separately.

whichever method you choose for coverage ('all employees' or 1. stautory include and 2 otherwise excludable) must be used for nondiscrim.

now, when you run nondiscrim you can aggregate or disaggregate the plans.

at least that is how I understand the rules.

The ERSIA Outline Book chapter 8 part C3 describes the avg ben pct test as

"This is a special aggregation rule and is required, regardless of whether the plans are otherwise permissively aggregated for coverage testing...

[chc93]

Tom... thank you very much.

[PensionPro]

We have two 401(k) PS plans that pass coverage separately. Employer wants to do straight 3% PS contribution in plan A. In Plan B employer wants to do 20% for HCEs and 5% for NHCEs using rate group testing.

In doing the 401a4 test for Plan B:

1) how are the employees from plan A getting 3% treated: are they excluded from testing or included as not benefitting?

2) how is ABP determined: just including plan B employees or all employees?

Thanks very much!

[MWeddell]

Especially if Plan A and Plan B cover mostly the same employees, it sure seems like you will have a better chance of passing the 401(a)(4) general test for plan B if you aggregate the plans for testing purposes.

However, if you want to keep the plans separate for testing purposes, then the answers to your questions are:

1) The Plan A contributions are ignored when performing a general 401(a)(4) test on just Plan B. Those employees are included in the denominators of the fractions when you test each rate group because they are part of the controlled group.

2) Average benefit test is performed for all plans (or at least all DC plans) and all employees in the controlled group.

3) Anticipating a question you didn't ask, you'll have to cross-test Plan B to have any chance of passing the 401(a)(4) test, so you'll want to check whether the 5% of pay contribution given to NHCEs uses a 415 definition of compensation in order to get through the comparability gateway.

[PensionPro]

Thanks for the response. The plans do not cover the same employees. Yes plan B is cross-tested and uses 415 comp.

[chc93]

Especially if Plan A and Plan B cover mostly the same employees, it sure seems like you will have a better chance of passing the 401(a)(4) general test for plan B if you aggregate the plans for testing purposes.

If you aggregate for 401(a)(4) testing, wouldn't the employees in Plan A require the 5% gateway?

[MWeddell]

You're right. Separate testing would then be needed to allow for cross-testing.

[BG5150]

[tangent]Whenever I see this thread title, I can't help to hear "Two Hearts Beat As One" by U2 in my head.[/tangent]