Safe Harbor Plan Uses Component Plans and Imputes Disparity

[John Feldt ERPA CPC QPA]

Suppose you restructure a safe harbor profit sharing plan for testing purposes. Also suppose the plan excludes HCEs from receiving safe harbor contributions (to minimize the required contribution in a bad year).

The owner and most other HCEs are in component plan A: the benefits-tested group with enough of the youngest NHCEs to pass the ratio percent test. The nonelective portion is tested for nondiscrimination by cross-testing and by imputing disparity on the regular PS nonelective allocations (can't impute with the SH amounts).

The owner's son however, is in the component plan B: the contributions-tested group with all the rest of the NHCEs where the intnet is that they all receive a total nonelective allocation of 5% of pay (5% PS for the son and 3% SH plus 2% PS for the others). The owner's son's wages are not over the taxable wage base. If component plan A imputes disparity, then imputing disparity in component plan B results in a 10% allocation rate for the son and 7% for the NHCEs (fail).

Assuming there is no other integrated plan sponsored by the employer and assuming the son is not a self-employed individual, when imputing disparity, must the entire plan impute disparity, or could just one component plan impute disparity and not the other?

How do you read 1.401(a)(4)-7(d)(2) for this?

[Bird]

I don't think you have to impute PD on both component plans. But I don't think I can prove it, sorry.

[DMcGovern]

See 1.401(a)(4)-9© Each component plan has to satisfy 401(a)(4) testing independently, as long as all the other requirements of this section are met. So yes, I believe you can use different methods to pass. Only gateway has to be satisfied on a plan-wide basis.

[John Feldt ERPA CPC QPA]

Thank you - yes, that's it: T.R. 1.401(a)(4)-9©(1): "If each of the component plans of a plan satisfies all of the requirements of sections 401(a)(4) and 410(b) as if it were a separate plan, then the plan is treated as satisfying 401(a)(4)."