SH 401(k) excluding new control group employees

[M Norton]

Small employer has SH 401(k).

Owner recently purchased second unrelated business and is now a controlled group.

Can otherwise eligible employees of newly acquired business be excluded from participation in SH 401(k) if plan can pass coverage using ABT?

[ETA Consulting LLC]

Sure. You have a transition period under 410(b)(6) to figure out the appropriate plan design going forward. Assuming you can pass 410(b) in an ongoing manner, you can continue to keep them separate after the transition period.

Good Luck!

[M Norton]

Sure. You have a transition period under 410(b)(6) to figure out the appropriate plan design going forward. Assuming you can pass 410(b) in an ongoing manner, you can continue to keep them separate after the transition period.

Good Luck!

Thanks for the response.

One of my associates agrees with you, but I am not sure how you get past the SH requirements for eligibility and participation.

This is a small plan, 2 HCEs and 4 NHCEs work for plan sponsor; 4 other NHCEs work for newly acquired separate business that is now part of the new controlled group. How do you keep the 4 NHCEs in the new business from becoming eligible and participating in the SH part of the plan?

[ETA Consulting LLC]

This is a small plan, 2 HCEs and 4 NHCEs work for plan sponsor; 4 other NHCEs work for newly acquired separate business that is now part of the new controlled group. How do you keep the 4 NHCEs in the new business from becoming eligible and participating in the SH part of the plan?

After the transition period, you would have a Coverage Ratio Percentage of 50%. So, you make a valid point given that the design, itself, would be less likely to yield a more favorable average benefits tests (assuming each HCE contributes a maximum deferral, typically at lower salaries). As a practical matter, you're correct in that the other employees should 'probably' be brought into the plan. Now, you can amend the plan to exclude one of the two HCEs. This will move your coverage ratio test to 100%. Given the fact you just doubled your NHCE base with no change to your HCE base, you will likely have to make changes after the transition period.

Good Luck!