Coverage Testing and Cross tested Plans

[Guest uncle jack]

I have a question regarding New Comparability Plans when testing under 410b and 401a4 as to which employees are part of the testing.

Example#1

Law firm – partners, associates and staff

PS New Comparability – all EES are Eligible - PS contributions only to Partners and Staff – zero for Associates

410b Test – passes (Associates are HCE)

410a4 Cross testing – Rate group based on all employees including Associates

Example#2

Law firm – partners, associates and staff

PS New Comparability – All Employees are eligible except for Associates who are excluded

410b Test – passes (Associates are HCE)

410a4 Cross testing – Are Rate groups based on all employees including the Associates or are Associates excluded from the denominator of the rate group percentage since they are not eligible employees and the plan passes 410b without them?

If any of the rate groups are less than 70%, then an ABT is required. Are the Associates included in the ABT?

Example#3

Law firm – partners, associates and staff

PS New Comparability – Only includes Employees of company #1 – only have Partners and staff (there are no Associates in company#1).

Company#2 only has Associates and are not eligible for company#1’s PS Plan

Company#1 and Company#2 are part of the same controlled group.

410b Test – passes (Associates are HCE)

410a4 Cross testing – Are Rate group based on employees of company#1 and not company#2 (Associates)

ie. Company #2 are excluded from the rate group percentage denominator since Company#2 employees are not eligible employees and the plan passes 410b without them?

If any of the rate groups are less than 70%, then an ABT is required. Are company#2 employee (Associates ) included in the ABT?

Can I include company#2 employees in my Rate Group testing even though the plan passes 410b and excludes them? Does Permissive Aggregation come into play?

[Tom Poje]

hopefull in an attempt to sum things up quickly I haven't left anything out.

assume all employees have met 1 year wait/age 21 and entry date.

for coverage

401(k) - all show up in denominator.

401(m) - all show in denominator unless terminated and less than 500 hours and did not benefit. if they were not a particpant (e.g. excluded from the plan) then they show in the denominator

nonelective - same as 401(m)

for nondiscrim testing

401(k) - only those employees actually eligible to particpate show up in the ADP test. Doesn't matter whether you defer or not. but if you were excluded from the plan you don't show on the ADP test (but are includable and not benefitting for coverage above)

401(m) - only those actually eligible to participate show up on the ACP test. If there is a last day rule (or hours requirement) and someone failed this then they don't show on the ACP test.

nonelective - no such rule exists as for ADP/ACP testing. if you are an employee who has met the initial eligibility you show up, with a big fat zero if you are excluded from the plan being tested. terminees less than 500 hours may be excluded, though again, must be an actually participant. if you are excluded from the plan you are not a participant, so you can't excluded those people (unless you have more than 1 plan and aggregate the plans)

but if you aggregate the plans, you must aggregate the plans for coverage testing as well.

whether you aggregate or not, all ees are in the avg ben pct test.

[Guest uncle jack]

Hi Tom,

Just to clarify. assume that I have a controlled group and the plans of company#1 and company#2 each pass their 410b coverage test. When performing the 401a4 cross testing for company#1, are all the employees in the controlled group included when determining the rate group percentages or only those employees who are part of plan since the other employees (company#2) were excluded and the plan passed 410b without them. If I understood your initial response correctly, you would include all the employees from company#1 and #2 when doing the general test (excluding statutory exclusions). Is this correct?

I thought that if a plan passes 410b, only those covered employees would be included when determining the rate groups of the general test and the other employees in the controlled group would be excluded. However, if the rate group percentage for any participant falls below 70% then an ABT would then be required for the entire controlled group. Obviously, if I am wrong, I would have to include all employees in the general test.

[Tom Poje]

for all practical purposes, in a controlled group situation you have 1 employer and a mess (technical term) of employees

if the plan are not aggregated for coverage and you are looking at nondiscrim only those employees in the actual plan you are looking at will have a benefit (and from that plan alone) and everyone else will show up as a 0.

Lets suppose I had 2 plans

1 HCE and 5 NHCEs in each plan.

If I run coverage separately on each plan I have

5/10 NHCE and 1/2 HCE and pass at 100%.

Lets suppose 1 plan had a 10% profit sharing and the other only 5%.

If I look at the 10% plan AND test on an allocation basis then I will have 5 NHCEs in the HCE group. (I will also have 5 NHCEs not in the group and 1 hve not in the group) so ultimately the results are the same as coverage.

Same thing will happen for the 5% plan.

or another way of looking at it, if you have a plan with a safe harbor formula (e.g. everyone receives the same %) then when testing on an allocation basis, the results will be the same as for coverage. It doesn't matter that you treat the people as 0. But treat them as 0 you must, despite passing coverage (which, by the way, you treated them as 0 as well)