Permissively Aggregate with 401k?

[austin3515]

Safe Harbor 401k Plan with 3% SHNEC going to the ESOP. May I permissively aggregate the 3% SHNEC going to the ESOP with a 6% profit sharing going to the owners in the PS Plan? Assuming of course I pass rate group testing. Both Plans are sponsored by the same employer and have the same plan year.

[ESOP Guy]

It has been a long time. I think the answer is "no". If I recall in order to do a rate group test on all plans you have to be able to do the 410(b) testing on all plans. There is part of the 410(b) regulations that say you can't combine an ESOP with other plans-- if I am recalling correctly.

[austin3515]

OK, I submitted to TAG. When they get back to me, I will let you know the answer.

[ERISA1]

I am curious whether anyone has an answer to this question yet.

I acknowledge the underlying objective is to get around the rule prohibiting cross-testing of ESOP contributions. Many will say it fails the 'smell test'. This may be so, but I wonder whether it passes the general testing for non-discrimination.

[austin3515]

The answer was no - an ESOP may NOT be permissively aggregated with any other plan.

https://www.law.cornell.edu/cfr/text/26/1.410(b)-7

©(2)

(2) ESOPs and non-ESOPs. The portion of a plan that is an ESOP and the portion of the plan that is not an ESOP are treated as separate plans for purposes of section 410(b), except as otherwise permitted under § 54.4975-11(e) of this Chapter.

[ESOP Guy]

OK, I submitted to TAG. When they get back to me, I will let you know the answer.

Took you long enough to get back to me as promised!

[ESOP Guy]

I am curious whether anyone has an answer to this question yet.

I acknowledge the underlying objective is to get around the rule prohibiting cross-testing of ESOP contributions. Many will say it fails the 'smell test'. This may be so, but I wonder whether it passes the general testing for non-discrimination.

You talk about doing a general test on an ESOP. You can do that for an ESOP it is just you can't combine it with the other plans. I have found that just using the general testing allows for rather aggressive allocation methods.

Obviously I don't know your objectives but I thought I would throw that out there.

[Tom Poje]

though the statement "ESOPs may not be aggregated with other plans" is only true to a point. for the average benefits percentage test, example 2 of 1.410(b)-7(e) aggregates the ESOP with other plans. no mention is made in the example if you have to run the test on an allocation basis. one of the plans in the example is a DB plan, so it would appear it could be allocation or accrual basis.

[austin3515]

OK, but if you're doing a 3% SHNEC in the ESOP, you cannot do a 6% PS for the HCE's in the 401(k) plan and claim that you pass 401a4.

Agreed? I think that is what we all wanted to know.