Top Heavy Minimum and Gateway

[Dougsbpc]

Have four 25% owners of a corporation. The corporation sponsors two 401(k) plans with no match that are cross-tested for profit sharing. Plan 1 covers all employees hired before 1/1/2007 and Plan 2 covers all employees hired after 12/31/2006.

1. Plan 1 provides profit sharing from 5% to 15% of salary.
2. Plan 2 provides profit sharing of 2% of salary to all eligibles.
3. The 4 owners (and the only key employees) participate only in plan 1.
4. No key employees participate in plan 2.
5. Each plan meets the reasonable classification test of 410(b).
6. Each plan passes the ratio percentage test of 410(b) considering only its own respective eligible employees.
7. Each plan passes non-discrimination (401(a)4) and ADP test considering only its own respective eligible employees.
8. Plan 1 would be top heavy by itself. Plan 2 would not be top heavy by itself but both plans together would be top heavy 67%.

Question:

1. My understanding is that if each plan can pass coverage and nondiscrimination on its own and only plan I has key employees, the top heavy minimum and gateway need not be provided in plan 2. Agree or Disagree?

Thanks a million!

[ETA Consulting LLC]

To answer "ONLY" your question about the TH minimum, you are correct. There is no "mandatory aggregation" for Top Heavy because there are no Key Employees in the 2nd plan (and nothing else that would require them to be aggregated).

Good Luck!

[Tom Poje]

just to make sure

when you say

"Each plan passes the ratio percentage test of 410(b) considering only its own respective eligible employees."

are you treating the folks hired after 12/31/2006 as includable and not benefiting?

as for 'required aggregation

the particular Code site is

I.R.C. § 416(g)(2)(A)(i)

(A)Aggregation group

(i)Required aggregation The term “aggregation group” means—

(I)

each plan of the employer in which a key employee is a participant, and

(II)

each other plan of the employer which enables any plan described in subclause (I) to meet the requirements of section 401(a)(4) or 410.

so as ETA indicated, the plans wouldn't be required to be aggregated.

[Dougsbpc]

Suppose we need to go to the average benefits percentage test to pass 410(b) if we include the folks hired after 12/31/2006 as includable but not benefitting. Does that change anything?

[Tom Poje]

it depends. there is one and only one avg ben pct test (I suppose possibly 2 if you test otherwise excludables separately)

but 1.410(b)-7 discusses the aggregation rules. even if you disaggregate the plans for coverage, if you need to run the avg ben pct test 1.410(b)-7(e) ...the plans in the testing group are the plan being tested and all other plans that could be permissively aggregated.

or put another way

Average benefits test is 2 parts

1. average benefits percentage test - all plans and pretty much any contributions including deferrals

2. nondiscrim classification test - only those plans being tested (so you end up with a bunch of people included and not benefiting because they show as zero since not aggregated.