Ratio % test means we're home free?

[Flyboyjohn]

This is one of those basic questions that seems too good to be true when you see it in action.

2 companies owned by the same individual, 1 has a 401k plan with cross tested profit sharing, other company has no plan

So long as the company with the plan can pass the ratio percentage test taking into account the employees of the controlled group we're good to go with no further combined testing (once we get past coverage we can test the 1 plan as if the controlled group doesn't exist)?

Thanks

[Tom Poje]

for controlled group, you act as if there is only one employer.

for purposes of coverage, anyone who has met the plan's eligibility is in cluded in coverage testing.

If they aren't eligible for the plan(they are members of the 'other' company' then they are treated as includable and not benefiting.

for purposes of 401k testing they 'vanish' they are not included because you only include those bodies that are eligbile to defer.

same with ACP (only if you are able to receive a match, 0% deferral = 0% match, but if you have a last day rule or hours requirement you would not be inlcuded in the ACP test.

for profit sharing you are included as a 0.

but if the formula is the same % (or integrated) for everyone then it is also true if you pass coverage you would pass nondiscrim testing. should be the same %

[rcline46]

But the OP says it is a cross tested profit sharing plan. As such all non-benefitting are in as -0-, and now you have to pass the rate groups.

[Flyboyjohn]

Allow me to restate the question.

The controlled group rules initially say that we have to test them as if they're one happy employer.

But then I think 410(b) says that if looking t the whole group we can pass coverage using the 70% ratio percentage test (and not the ABT) we can go back to ignoring the controlled group status and test for discrimination as if the other employer didn't exist.

Correct?

[12AX7]

Rcline, you are correct but I think that is what Tom is saying. RPT is not a free pass to exlude the 0 benefiting group if the plan is cross-tested.

[Tom Poje]

lets suppose I have plan A 7 NHCE 1 HCE, company B 3 NHCE.

controlled group. only plan A exists

For the sake of the argument lets suppose no hours/last day for either match or profit sharing.

For coverage I have 3 tests

401k

401m

401(a)

all pass at 70%.

for nondiscrim I have 3 tests

ADP - only include those eligible to defer, so yes at that point it is like company B doesn't exist

ACP - same as for ADP

401(a) - profit sharing - you still include company B employees as 0.

but if I gave everyone 5%, then 70% of the NHCEs received 5%, so the plan passes nondiscrim ratio %, and yes indeed it is the same as for coverage.

If the profit sharing formula is different (larger % for the HCE) then you still need to pass somehow, and the folks from B counting as 0 don't help,

you can not have, for example, a formula that provides 10% to the HCE and 5 NHCEs and say 5 of the 7 NHCEs in company A are in the rate group, that is 5/7 or 71.4% so I pass. You would still only have 5/10 and would fail unless you also pass avg ben % testing.

[Flyboyjohn]

Great and thorough answer, thanks

Just one m ore follow up, I promise:

Do the B employees have to receive gateway minimum?

[rcline46]

They are not eligible for the plan, therefore get no Top Heavy and no Employer contributions, therefore, no gateway.