410(b) testing when one employee works for both members of controlled group

[Floridaattorney]

company A and company B are members of a controlled group. Both have their own 401(k) plan. one is safe harbor. one is not. Smith is an HCE on the payroll of each company. he only makes salary deferrals in one plan but, could defer in both.

in doing 410b testing for one of the plans you typically use a numerator of that plan's benefitting hce employees and divide by the total number of hce employees of the entire controlled group. But, would you count that hce as an employee one time or two times in determining the denominator?

we cant do permissive aggregation because one plan is s/h and one is not. However, I know that for the adp testing you have mandatory aggregation of HCE's for adp and acp testing.

Is there some sort of mandatory aggregation of HCE's for 410b testing purposes? And, is the HCE counted as one employee or two employees of the controlled group?

I would appreciate any citations if possible.

Thank you!

[ETA Consulting LLC]

I would say that:

1) This particular HCE is considered as "benefiting" under each plan. Other HCEs will be considered as benefiting in their own respective plans, and not benefiting in the other plan. However, since this particular HCE is employed with both members of the controlled group, he is benefiting in each plan.

Now, we know there is mandatory aggregation of the HCE deferrals since he is eligible for both plan. So, his deferrals in the safe harbor 401(k) plan must be included in the ADP test for the non-safe harbor plan (I am not aware of an exception, but one may exist). In order to avoid this, the non-safe harbor plan should be amended to exclude any HCE who is a member of the other company's plan (as a class). This would serve to treat this HCE as not benefiting under the non-safe harbor plan and will also exclude him from the ADP/ACP test of this plan; leaving him benefiting and eligible in only the safe harbor plan.

Good Luck!