Cross-tested PS and 401(k) with PEO Plan

[bcmom]

The client is part of a PEO which handles all the HR functions and paid through PEO. Employees can make 401(k) contributions to PEO calendar year 401(k) Plan. The client sponsors a separate PSP for employer contributions. The PSP is an off-calendar year plan that uses calendar year comp for contributions and testing. The PSP contribution is cross-tested. I believe I need to include the 401(k) contributions for non-discrimination purposes and the 401(k) account balances for Top Heavy Testing. Is that correct?

[Mike Preston]

Yes, but it is more technically accurate to say that you need to include the 401(k) deferrals for average benefit test purposes. Does the 401(k) plan allow for anything other than deferrals?

[Tom Poje]

to clarify, normally you can't aggregate plans with different plan years for nondiscrimination purposes. the only exception being the average benefits percentage test. and in that case:

If a group of plans is required to be aggregated for purposes of determining the employee benefits percentage, the testing period is the plan year of each plan that ends within the same calendar year. The plan year is referred to as the relevant plan year or, in the aggregate, as the testing period. [Treas. Reg. § 1.410(b)-5(d)(3)(ii)]

 

for top heavy, :

If qualified plans are aggregated in a top-heavy group the value of benefits is determined separately for each plan, and they are aggregated based on determination dates that fall within the same plan year. The actuarial assumptions must be the same for all plans within the aggregation group and must be reasonable with respect to mortality and use a reasonable interest rate. [Treas. Reg. § 1.416-1, T-23, T-26]

[bcmom]

Mike - The PEO's 401(k) plan allows for employer contributions, but this company does not make any employer contributions to the PEO.

Tom - The PEO's 401(k) is definitely a calendar year for all purposes. The client's PSP is a 9/30/16 year end, but compensation and the limitation years are both defined as calendar year. So for my 9/30/16 PS PYE, I'm using the 2015 calendar year comp for contribution calculations and testing. So do I include the 401(k) contributions in the average benefits test? This is the 1st year I'm working on the plan and I can't tell what the prior TPA did.  The PSP by itself is not Top Heavy and from the information I see, it probably is not Top Heavy if I were to aggregate. Another twist to this is that the PSP excludes bonus, commissions, holiday and vacation, so I am still assembling data to be sure it passes 414(s). So with the assumption I needed to test the 401(k) contributions with the PS, I plan to use total comp for testing purposes. If I don't have to include the 401(k) contributions, then my testing comp will depend on the 414s results.

[Tom Poje]

yes, you have to include all contributions in the avg ben pct test

[bcmom]

Thanks to both of you for your help. Glad to hear the voices of people I trust confirm what I thought was correct.