Coverage Testing w/ Two 401(k) Plans

[Rob P]

We just took over two plans that are sponsored by a law firm, and I am trying to convince myself that I am testing the plans properly. The original plan design was to keep them disaggregated for testing since the client doesn’t want to give TH minimums to associates.

The first plan (Partner/Staff Plan) covers partners and staff and has a 1-year of service eligibility requirement. The Partner/Staff Plan has both 401(k) deferrals and employer nondiscretionary.

The second plan (the Associate Plan) covers associates and staff with less than 1-year of service and has no eligibility requirements. The Associate Plan is only 401(k) deferrals. Note that all Associates are HCEs (in there second year) and there are no keys that participate in the Associate Plan.

For simplicity assume:

20 Partners (all HCE / key)

40 Staff (all NHCE) with more than 1-year of service

10 Associates (all HCE) with more than 1-year of service

15 Staff (all NHCE) with less than 1-year of service

Question 1 - Coverage: Does the Associate Plan pass coverage under 410(b)? Am I correct that the calculations would be:

[ ( 0 / 40) / ( 10 / 30) ] = 0% if statutory exclusions are applied, and

[ ( 15 / 55) / ( 10 / 30) ] = 82% if statutory exclusions are not applied.

Does coverage pass with statutory exclusions since no NHCEs are eligible to benefit?

Question 2 – ADP Test: If I cannot apply statutory exclusions to pass coverage, can I apply them with the ADP Test?

Question 3 – Average Benefits Test: The Partner/Staff Plan employer nondiscretionary uses a new-comp allocation. Assuming the Associate Plan passes coverage separately; can I ignore the Associate Plan in my ABT for the Partner/Staff Plan?

Any input is appreciated.

[Mike Preston]

Q1.a It passes with 82%

Q1.b No, it fails with 0%.

Q2. No.

Q3. No.

[Rob P]

Mike, thanks for the response. Much appreciated.