Control Group - Separate plan, separate PS

[Mr Bagwell]

Company A just bought a bankrupt company's assets.  A new company is created out of the bankrupt assets: Company B.  Company B is a single member LLC owned by Company A.

The employer is wanting to keep Company A 401(k) separate from Company B 401(k) plan.  Easy enough to set up the new Company B 401(k) and move forward.

Both plans are going to be setup with same plan year ends and the same plan provisions.  The potential difference is profit sharing contributions per plan.  Plan A might be 5%, Plan B might be 0 or 2%, or whatever based on their own profitability.

If I understand this correctly, as long as each plan satisfies coverage (410b), each plan can do whatever they want for profit sharing.  Here are some numbers....

Company A:  Non excludeables NHCE 468, Benefiting NHC 426, Non excludable HCE 27 Benefiting HCE 25

Company B: Non excludeables NHCE 90, Benefiting NHC 80, Non excludable HCE 2 Benefiting HCE 2

Company A coverage: NHCE 426 of 558 equals 76.34, HCE 25 of 29 equals 86.21,  88.56% Passes

Company B coverage: NHCE 80 of 558 equals 14.34, HCE 2 of 29 equals 6.90.  207.89% Passes

1.  Is my math correct?

2.  If so, test separately, profit share each company separately.

Am I missing anything obvious?

 

[ETA Consulting LLC]

Your math is correct (on the surface).  The non-excludables change when testing.  For instance, if a person in B doesn't receive a contribution because he terminated with less than 500 hours, he's still not a non-excludable for A's test, because he wouldn't have receive a contribution in H even if he had remain employed.  Keep that rule in mind when testing under Section 410(b).

Plus, you "MAY" have some transition rule relief, but that would require a little more details on the actual series of events.

For the most part, I think you have it figured out.

Good Luck!

[Mr Bagwell]

Thanks ETA!

 

[austin3515]

Let's say Plan A is cross tested and giving 6% contribution, and Plan B gives only 1% contribution.  Is there ever a scenario where you have a gateway issue given that both plans pass coverage independently?

[Mike Preston]

Does not compute. "Plan A is cross tested and giving 6% contribution."  Why in the world would you cross test that?

[Mr Bagwell]

Austin,

You are jumping in deep.....

I don't think there is an issue with gateway because both plan pass coverage independently.

The scenario gets ugly if you have to test Nondiscrimination for all plans together.  The gateway would come up because both plans are not getting the same safe harbor definition of profit sharing.

I was afraid with my scenario above that the plans would have to be tested together and the employers would have different PS %'s and then rate group testing comes into play.  I was being selfish and did not want to go down that path.

Then you bring up cross tested on one plan and pro rata on another......lol.

[austin3515]

Mike you're quite right - I meant 6% for the HCEs and 2% for the NHCE's - so the people in plan B are getting less than the gateway.

Basicaly if you're clever about splitting your plans out you can reduce the gateway.  I think that was my point, and I had not realized that before.  So have a separate PS Plan for the "hygienists", which you make sure does not cause a converage problem, and poof you can give them 1% PS even thought the GWM might be 5%.

[austin3515]

And by the way, it is not part of the required aggregatin group because no key is eligible, so no THM.  And no 3% Safe Harbor neither.

[Mr Bagwell]

Austin's theory of a Plan for the Dr and a Plan for the hygienists has been pestering me for weeks.

How would you ever get the two Plan design to pass coverage?

Suppose that the Dr Plan has one HCE and the Hygienists Plan has 2 NHCEs.  The Dr Plan wouldn't pass coverage because you can't exclude the hygienists in the coverage test because of the employment classification.  (I assumed they met the age and service requirements)  The H Plan would pass coverage based on the two hygienists receiving some sort of allocation and the HCE did not.

Help me out.  How would you ever get the Dr Plan to pass coverage?  I am missing something. :)

[austin3515]

Mr Bagwell, if you go back and look at my post you will nogte that I qualified it based on the fact that both plans pass coverage.  So the hygienist plan has just NHCE's so that plan passes.  Let's say there are 3 hygienists.  And the dentist's plan has 1 HCE, and 4 receptionists, and 3 dental assistants.  To me that is 7 out of 10 NHCE's benefitting in the Dr.'s plan which passes coverage.

Is it a lot of extra work? Sure it is.  Maybe it's not worth it.  But it wasn't something I was going to propose to a client, just a hypothetical fact pattern to augment my understanding of the rules.

[Mr Bagwell]

All good Austin.  I knew it was all hypothetical.  Thanks for clarification.  I just couldn't see a logical answer.

I have owner's of a plan that would love to profit share more dollars without busting the books.....  I have exhausted the possibilities.

Thanks

[austin3515]

I suppose you could really amplify this design if you were comfortable relying on Average Benfits testing to boot.  The nondiscriminatory classification threshold being greatly reduced would allow you to keep out a greater percentage of the employees.  Interesting...