Nondiscrimination testing

[holdco]

Hello everyone!

A 410(b) nondiscrimination testing question I was hoping someone might be able to weigh in on.

Employer has a retirement plan that allows for 401(k) and profit sharing. Employer has a wholly-owned subsidiary with a separate plan (not sponsored by Employer), which is another 401(k) plan. The two plans have to be aggregated under 414, but the two companies operate entirely independently. When tested, the employer fails 410(b) average benefit testing. The subsidiary passes.

1. We plan to make a corrective amendment allowing for an increased allocation. Does this allocation have to be made to the employer plan, or the subsidiary plan?

2. Do the profit sharing contributions of the employer plan have to be considered in some way (in respect of the allocation or otherwise)?

[shERPA]

No offense, but you are mixing apples, oranges and cucumbers here.

The companies are aggregated under 414 as a parent-sub controlled group, not the plans. 401(k) and PS components are mandatorily disaggregated for testing. Each component may be permissively aggregated with its counterpart in the other plan for 410(b) testing if they do not pass 410(b) separately.

If the plans can be aggregated for 410(b) and pass the ratio test on this basis, then they must be tested for non-discrimination (ADP for 401(k) component, 401(a)(4) for profit sharing component) on an aggregated basis. If they pass this way you are done, if not, then you need a correction, QNEC or refunds for ADP, additional NHCE contributions for PS, for example.

If you are relying on the average benefits test for passing 410(b) then in addition to the 70% threshold, the non-discriminatory and reasonable classification tests must also be satisfied.

There are rules about aggregating plans for testing, they are complicated and there are endless permutations possible. It is well beyond the scope of a message board to help at this level, but rather it should point you in the right direction. Hopefully this does that.

[holdco]

No offense, but you are mixing apples, oranges and cucumbers here.

The companies are aggregated under 414 as a parent-sub controlled group, not the plans. 401(k) and PS components are mandatorily disaggregated for testing. Each component may be permissively aggregated with its counterpart in the other plan for 410(b) testing if they do not pass 410(b) separately.

If the plans can be aggregated for 410(b) and pass the ratio test on this basis, then they must be tested for non-discrimination (ADP for 401(k) component, 401(a)(4) for profit sharing component) on an aggregated basis. If they pass this way you are done, if not, then you need a correction, QNEC or refunds for ADP, additional NHCE contributions for PS, for example.

If you are relying on the average benefits test for passing 410(b) then in addition to the 70% threshold, the non-discriminatory and reasonable classification tests must also be satisfied.

There are rules about aggregating plans for testing, they are complicated and there are endless permutations possible. It is well beyond the scope of a message board to help at this level, but rather it should point you in the right direction. Hopefully this does that.

Thanks much for the comments. I rushed the first message, so I was less precise than I would have liked to be.

Yes, the companies are aggregated under 414 controlled group rules. Employer A has a 401(k) plan with a matching and profit sharing component (Plan A). Employer B (wholly-owned by Employer A) has a 401(k) plan also (Plan B). We're unclear what kinds of contributions are permitted by this plan. Employer B did not conduct separate testing, and their Plan B was aggregated with Plan A. Plan A fails the ratio test and is currently conducting the average benefit test.

I agree that the profit sharing component must be tested separately to satisfy 410(b). The testing group consists of the 401(k) plan and all other plans that could be combined with the plan for purpsoes of satisfying the ratio percentage or the nondiscriminatroy classification test. The rules requiring disaggregation on the basis of types of contributions are ignored. So, are you saying we have to split the 401(k) and (m) components in Plan A and Plan B and combine them with their counterparts for the test? I thought we did not have to segregate the 401(k) and (m).

That said, I'm assuming that we'll fail the average benefit test (401(k) and/or profit sharing component). The Regs. provide for corrective amendment, by which we'll increase our allocation. Broadly speaking, I'm not sure where this corrective allocation goes, Plan A or Plan B, or what form it takes.

[Mike Preston]

OMG. There is so much that you have written that is contrary to the rules of testing that you just have to go out and hire an expert. NOW!