Controlled Group - Am I missing something?

[seatpa]

I'm pretty sure the answer to my question is, "No, you're not missing anything", but this situation is odd and making me wonder if I missed the boat.

Two brothers each own 50% of Company A. There are no other owners. Company A has a safe harbor match 401k. The owners participate in the plan. There are 4 HCEs (including the 2 owners) and around 5 other eligible NHCEs.

The same two brothers also each own 50% of Company B. There are no other owners. Company B has a seperate 401k that is NOT safe harbor. The owners do not participate in this plan. There are no HCE's and around 50 eligible NHCEs.

(The two businesses are also in the same industry and frequently operate together on various projects.)

The plans have always been operated completely independently of each other, as if the other plan/company didn't exist.

But they are a obviously a controlled group. The plans can't be aggregated for testing because one is safe harbor and one is not. Company A's plan is completely blowing it's nondiscrim testing every year (for at least the last 5 years).

Did their prior TPA screw up, or am I missing something? Any thoughts?

[austin3515]

As long as both plans pass coverage you have no problem. If Company B plan excludes the owners, then plan B passes by default because only NHCE's benefit (assuming they were excluded from that plan).

Then we get to Company A. Since 100% of all HCE's benefit in the Plan, and just 10% of all NHCE's benefit, even Average Benefits won't help you.

So yes, the prior TPA has some explaining to do...

I see a VCP submission in your future and some big giant checks in your clients future

[seatpa]

Yup, that's my conclusion as well.

You have made me feel a lot less crazy.

I've just never run into something like this before. I've run into a few situations where there was an unknown controlled group issue, but never something like this where the TPA (a big, well-known name) administered both plans.

I just kept looking through the files and going, no, no, no, no, wtf??? Ha.

I feel for my client.

[austin3515]

I find that big well known names are the most likely to have these sorts of problems, especially on smaller plans.

In fact, I already know what the TPA's response is going to be. They received a questionnaire in which they asked "Are there any other employers sponsoring plans that are considered part of the same controlled group?" and the client of course said "no."

Let me knw if that is indeed the response!

[Tom Poje]

when you say the "plans can't be aggregated because one is safe harbor and one is not"...

raises a question. just what portion of the plan are you talking about?

just what 'plan(s) is(are) being tested?

by the rules I have to test 401k, 401m and nonelective separately.

so now I have 401k for A and 401k for B. since one is safe harbor and the other not, I can't aggregate.

but what about the nonelective portion? Even the ERISA Outline Book suggests (8 VII B 3) indicates

"the decision to permissively aggregate the 401k arranegement is made independent of the decision to ... aggregate the nonelective portion."

In other words, if I am looking at the nonelective portion can I aggreagte (especially since the one is safe harbor Match and is not a safe harbor nonelective)

[BG5150]

And when you say the owners "do not participate" in the second plan, what do you mean? They don't make 401(k) deferrals? Or are they explicitly excluded from the plan?

[austin3515]

Tom, are you suggesting this plan has some hope? Or do you agree that the plan has some serious problems. Why do you mention the non-elective aggregation? It doesn't sound like there are nay nonelective contributions?

[Tom Poje]

actually the original post made no mention of exactly what was being really being tested, simply a statement the plans couldn't be aggregated because one was safe harbor and the other wasn't, so my response was "true if looking at the 401k portion, but what if you are looking at another portion."

[seatpa]

Right. I can't aggregate the plans for 401k or 401m because of the safe harbor issue.

I know I could aggregate for nonelective, but they haven't ever made (and do not intend to make) nonelective contributions, so it's moot.

ETA: The owners never show up in the census data for company B's plan, but they are not excluded from participating. Presumably, the could participate if they wanted to participate.