controlled group testing

[K2retire]

We amended a plan last year to add a participating employer based on the plan sponsor's representation that it was acquiring the participating employer. It is set up as a cross tested allocation with each employer as an allocation group. We now have been told that both companies are part of a much larger controlled group that includes at least one other plan. (Apparently this was also true in 2011 and the other company's TPA did some sort of combined testing, but didn't feel the need to share it. I have no idea where they got the data.)

I've never done a cross tested allocation that included only some of the companies in the a controlled group before. Do I have to include the other companies' employees in the 401(a)(4) test as zeros, or just in the coverage test?

[ETA Consulting LLC]

_{The term "cross-testing" merely means that you are converting the allocation to an equivalent benefit rate and performing the ratio percentage test on this figure (loosely stated). You do not have to cross test merely because you have two separate companies in a plan where each company provides their own allocation rate to their own employees. If the HCEs and NHCEs are properly disbursed across each company whether the coverage ratio percentages of each company will be at or above 70%, then you are fine. If one fails, then you'd have to look at other methods of testing. Even if you were to perform the average benefits test, you may do this on "allocation rates" instead of "equivalent benefit accrual rates (aka cross-testing).}

_{In other words, don't jump immediately into cross testing. Just perform the coverage ratio test for each allocation rate before you look at other testing methods.}

_{Good Luck!}

[Tom Poje]

This type of question makes my brain hurt, so lets make sure of the details.

It sounds to me like you said you have 2 companies, each with its own formula.

In addition, there is a 3rd company you have no details on, and whoever processes that plan actually has at least the census details on your two plans, because the other TPA did some type of testing.

well regardless.

and it sounds like the other firm has put its stamp of approval that the whole thing passes coverage, but it was not indicated if this was done with disaggregate testing or combined testing.

If it was tested disaggregately for coverage, then it had to pass either the ratio test (treating other employees as includable and not benefiting)

or it had to pass the avg ben test. this includes the avg ben pct test, which means they had to know what the contributions were from the plans you run.

There is one and only one avg ben pct including all employees and all contributions regardless if you choose to disaggregate the plans. (The exception being if you choose to disaggregate otherwise excludables)

if they aggregated the plans, then any nondiscrim would be also aggegated, and, assuming these are also 401k plans, that means combined ADP tests, and something in my head says that didn't happen, so we will assume disaggregated plans.

for ADP and ACP tests you only include people actually eligible, so you never see the people from the other plans.

for nonelective testing, my understanding is everyone else does indeed show up as 0 if you disaggregate.

If plan A allocated 5% and plan B allocated 8% and each passes coverage on its own, then the results should be the same when testing on an allocation basis, which is what, I believe ERISA Toolkit is getting at.

[K2retire]

Tom, I think you've got the details, as I understand them. Except that there are somewhere between 3 and 10 companies. I have no information on what type of plan or plans the other companies may have. I also have no idea what information they have about my plan -- or where they got it. That makes me suspicious of their results.

ETK, are you saying that (ignoring the other companies for a moment) if I have a single plan with two different allocation rates, based on divisions, I don't have to do a 401(a)(4) test on that contribution?

[ETA Consulting LLC]

ETK, are you saying that (ignoring the other companies for a moment) if I have a single plan with two different allocation rates, based on divisions, I don't have to do a 401(a)(4) test on that contribution?

No. I am saying that 401(a)(4) testing doesn't automatically mean cross-testing. In this instance, you will have two distinct allocation rates. If each rate passes the coverage ratio test on its own, then there is not problem. You don't have to cross-test the plan merely because there is a different allocation rate being given to different groups of employees.

Good Luck!