ABT - and Restructuring

[Gilmore]

I know this question is probably overdone, but I hope you will indulge...

Safe Harbor 401(k) uses basic match. ER rarely makes a profit sharing contribution, but this year they are considering.

The HCEs are Owner, Owner's recently divorced spouse, two Owner's children (in 20s), and one non-Key HCE.

Only the Owner is being targeted, and non-Key will receive top heavy minimum.

PS is allocated by putting each ee in their own class.

HCEs do not receive safe harbor contribution, however the two children deferred a lot in relation to their compensation.

ABT is not passing by a wide margin due to the deferrals of the Owner's children.

Am I correct that, even if the plan was restructured into component plans in which the children were in their own plan, and would not need to rely on the ABT since they are not benefiting under 401(a) to pass 401(a), because the other component plan would need to rely on the ABT, that the ABT would include the contributions of both component plans?

That is to say that, regardless of the number of component plans, if one component plan requires the ABT to pass 401(a), then the ABT includes everyone's contributions?

Thanks for the help.

[ETA Consulting LLC]

You are correct. You would use Component Plan testing to avoid ABT. But once you go ABT, then "ALL" employees in "ALL" plans.

Now, let's not begin the book of caveats (e.g. Union) :-)

Good Luck!

[Gilmore]

So is the following scenario possible?

The plan consists of 5 HCEs: Targeted Owner, non-key HCE receiving 3% top heavy, and 3 HCEs not benefiting under profit sharing.

NHCs: 5 NHCEs, 4 of which received at least 3% match.

Component Plan A: HCEs would consist of the 4 non-owner HCEs. NHCs would consist of 3 of the NHCs who received top heavy under match, and would not benefit under profit sharing, plus one NHCs who would receive the 5% gateway.

Am I correct that this Component would pass rate group using allocation rates since 1 out of 4 HCEs, and 1 out of 4 NHCs are benefiting?

Component Plan B: Targeted Owner and one NHCs, each receive identical EBARS.

I'm thinking that each component would satisfy the ratio test.

I appreciate the assistance.

[John Feldt ERPA CPC QPA]

Generaly, all NHCEs get the minimum gateway if any testing includes benefits testing.

In your example, you have one component plan consisting of 2 people: the targeted HCE and the lowest cost NHCE (based on age and pay) - this component is tested on a benefits basis.

Then, you have a second component plan with the other 4 HCEs and the other 4 NHCEs - this passes on a contributions tested basis. Even though this component plan is not cross-tested, they must receive the gateway because another portion of the plan is benefits tested (unless some other rare exception under 401(a)(4) applies to allow you to avoid the gateway). The gateway is a planwide minimum, not a component minimum.

This avoids the ABT because each HCE rate group is over 70%.

[Gilmore]

Hi John,

Thank you for the explanation. One question, though.

If the 3 NHCs in Component Plan A do not receive any benefit under 401(a), are they still required to receive the gateway? I thought only NHCs who benefited under 401(a) were required to receive the gateway. Since they are not receiving a top heavy minimum under 401(a), as it is already satisfied under the match, is it possible that they would not need the gateway and their benefit under 401(a) would remain at 0%?

Thanks for your patience.

[John Feldt ERPA CPC QPA]

The nonelective portion of the plan must satisfy 410(b), so if the TH minimum was fully satisfied with the match, then they are not entitled to get the gateway unless 410(b) becomes a problem.

Of course, you have to watch out for any HCEs who are not key - they would also need to get a match equal to 3% of their total 415 wages.

So, in your example, if you truly have 4 NHCEs out of 5 that all get an allocation of at least 3% of their total 415 wages as a match, and IF only 1 out of 5 HCEs get any nonelective allocation, then you pass 410(b) for the nonelective portion of the plan.

And if the one NHCE who is not getting a match also happens to be a nice demographic to use for cross-testing, then you have some really nice, but really specific and rare demographics.

Of course, if any of the nonkey HCEs or any of the NHCEs stop or reduce their deferral below the amount needed to get a full 3% of pay as a match, then any top heavy minimum will bump them up to the gateway in addition to any match they were getting already. If any new employees are hired or if anyone leaves, that could also cause issues.

Aren't you glad that the 401(a)(26) regulations are not applicable to DC plans?

Maybe someone can post cite from the 1.401(a)(26) regulations that spells out where DC plans are exempt from those rules, just for the readers here.

[John Feldt ERPA CPC QPA]

This makes me think of a non-uniform PS allocation, just a different conversation occurs:

Employee 1 says "Hey, how about that profit sharing contribution, my old company never did that."

Employee 2 replies, "Huh? What profit sharing, you mean the company match, right?"

Employee 1 says "No. I'm not deferring, so I don't get a match."

Employee 2 replies, "Really? I'm going to call Tom Poje and ask him what's going on here."

Tom Poje says "You should change your deferral so you only get a 2.99% of pay matching contribution. Have nice day."

[Gilmore]

Thanks John,

All good stuff, and you are pretty close in your analysis of the demographics. Actually all 5 of the NHCs will receive more than 3% in the match. But we will need to benefit at least 1 NHC in Component Plan, as you are correct, there is one non-Key HCE who must receive the top heavy minimum, so the benefiting NHC will need to get the gateway.

This is actually a bit of damage control. The census they originally provided to run the original illustrations showed the two younger children of the owner as not deferring, and since HCEs do not receive the safe harbor match, the ABT was not an issue. Now we get the numbers for 2013 and of course the children are deferring.

To me this is a starting point. They are not concerned about providing additional benefits to the HCEs so if they want to be more equitable to the NHCs we know that will not be an issue, based on your agreement of the testing method above.

I can't thank you enough for taking the time to work through this.