Permissive aggregation for coverage testing

[Belgarath]

Want to see if I'm nuts. I'm looking at a situation where an employer has an ESOP, and a 401(k) plan. The 401(k) plan provides deferrals and a safe harbor match only. The census/testing results provided for the ESOP are confusing at best, but it APPEARS that the ESOP failed the 70% ratio test for coverage. It further appears that the ESOP was then permissively aggregated with the 401(k) to "allow" it to pass coverage.

Now, under the mandatory disaggregation rule in 1.410(b)-7(c)(2), it would appear that for coverage purposes, an ESOP plan (or portion of plan) can't be permissively aggregated even with another non-ESOP Profit Sharing plan (or portion of plan), (other than as provided in 54.4975-11(e)), much less with a 401(k) or 401(m). Am I missing something? Before checking with the TPA, I'd like to think I understand what I'm talking about...

Thanks.

[Tom Poje]

I think understanding women is easier than understanding much of the regs (I am somewhat clueless on either much of the time), but by now you should know any of my comments come from someone who is nuts.

Agree you aren't suppose to aggregate ESOP with non esop, but it depends on what part of testing you are talking about.

1.410(b)-7(e)(2)    is an example with 6 plans.

Plan E is an ESOP and it is aggregated, but this is for purposes of the Avg Ben Pct test only (and I don't think you could impute disparity on that portion of the aggregated group either)

[Belgarath]

Thanks Tom - I'm talking purely about coverage testing, and not the average benefits percentage test. So you agree that for these coverage testing purposes, no aggregation?

 

[Mike Preston]

Correct. None.

[Belgarath]

Thanks, gentlemen.

[CuseFan]

The average benefits percentage test is a coverage test, which requires you include 401(k)/(m) amounts/benefits in determining an AB% for the Employer's group of plans. Then if ESOP satisfies nondiscriminatory classification and safe harbor percentage, and the AB% > 70%, the ESOP passes coverage on its own.

What clearly can't be done is say that the ESOP and 401(k)/(m) together covers > 70% and so passes ratio percentage test. If the ESOP service provider is showing that, it's time to look for a new provider, but hopefully they are simply showing the scenario portrayed above.

[Tom Poje]

the IRS has the following in their

Coverage and Nondiscrimination – Demo 6

 

The following are considered separate plans under Income Tax Regulations

the 1.410(b)-7(c) disaggregation rules. The separate plans are the portion of

the employer’s defined contribution plan that provides:

employer nonelective contributions,

elective contributions under 401(k),

matching contributions under 401(m),

employee after tax contributions under 401(m), and

ESOP contributions.

Please note that the average benefits percentage test exception above applies

to these items.

https://www.irs.gov/pub/irs-tege/epchd1004.pdf

..............

now, what if the allocation is in the ESOP plan but is not a stock contribution, but rather simply an additional profit sharing, since all the shares have been allocated. e.g. the above reads like a single plan that could have deferral, match, nonelective and ESOP.