Testing Related Group Plans

[415 Limit]

I'm considering taking over the administration of three plans that are part of a controlled group. 

All plans have the same plan year-end, none of the plans are safe harbor, and all use the current-year testing method.

Plan A - The profit sharing formula is integrated with Social Security, and they plan to allocate a $40,000 contribution.  There are 3 employees (all eligible) in total, 1 is an HCE, and 1 of the 2 NHCE's also works for Employer B.

Plan B - The profit sharing formula is cross-tested, with each participant in their own group, and they plan to allocate a $100,000 contribution.  There are 100 eligible employees, of which 21 are HCE's, and 79 are NHCE's (the 79 includes the 1 employee that also works for Employer A).

Plan C - no wages were paid by Employer C during the plan year in question, therefore there are no contributions.

How would these plans be tested:

• 410(b) test on the 401(k) Deferral component - should the plans be aggregated for this test, or should each plan run its own test?

• 410(b) test on the Non-Elective component - should the plans be aggregated for this test, or should each plan run its own test?
• 401(a) - should the plans be aggregated for this test, or should each plan run its own test?
• ADP test - should the plans be aggregated for this test, or should each plan run its own test?

I see a few issues here already, but before I go down a rabbit hole, I'd appreciate any input on how to move forward.

Thanks in advance.

[C. B. Zeller]

Assuming C has no employees, then

A: (2/80)/(1/22)=55.00%

B: (79/80)/(21/22)=103.45%

So plan B passes the ratio percentage test, plan A fails ratio percentage but might pass average benefits.

If A fails average benefits, then it would need to be aggregated with B for coverage.

Whatever aggregation options you use for coverage, you have to do the same for nondiscrimination (i.e. 401(a)(4) and ADP/ACP).

If A and B are aggregated for nondiscrimination, then A's safe harbor formula won't do you much good and you'll have to general-test them.

[CuseFan]

Looks to me like Plan A does not pass ratio percentage (I get 55%). If the CG can satisfy average benefits then you could test A separately on ADP and the PS appears to be a safe harbor (depending on comp definition).

If you do not pass average benefits then you MUST aggregate A with B to satisfy coverage and then must also aggregate to satisfy nondiscrimination (ADP, 401(a)(4)). 

Since B is cross-tested, you may very well have to run average benefits for the CG anyway, so you'll have your answer on the above. 

Note if you do not HAVE to aggregate, you may permissively aggregate and do so independently with regard to 401(k) and 401(a).

If you want hasenpfeffer sometimes you have to go down that rabbit hole!

[415 Limit]

Thanks very much for your input, is is extremely helpful.  But the rabbit hole has gotten deeper - is this right?

• The Average Benefits test does not pass.  Therefore, plans must be aggregated for all non-discrimination testing.
• One additional NHCE would need to benefit in Plan A (fail safe provision per the plan document).
• This NHCE would need to receive a QNEC equal to 100% of the NHCE ADP in Plan A.  The QNEC may not be counted in the average benefits percentage test.

How then, is profit sharing allocated in plan A?  If allocating according to the integrated formula in the document, does that trigger plan B satisfying the gateway when aggregated with plan A, or are employees of plan B treated as not benefiting in plan A, or?  Not quite sure where to go next with this.

Thank you for any additional input in this complex maze.

[CuseFan]

Do not understand your second bullet, on aggregated basis does not Plan AB satisfy coverage at 70%+ w/o further action?

PS allocations happen in each plan per each document but then cross-tested as Plan AB together, which creates a gateway under A where there wasn't one before. 

[415 Limit]

Thank you.

Apologies, let me rephrase to make sure we have this right:

• If we bring in 1 additional employee to benefit in Plan A (for both the 401(k) component and the profit sharing component), 410(b) will then pass.
• This NHCE would receive a QNEC in Plan A (as described in previous post) in order to "benefit" from not being allowed to defer in Plan A.  The NHCE would also receive a PS allocation in Plan A.

PS allocations will be made to each plan respectively, according to the formula in the plan document, and then tested together.  If this triggers the gateway in Plan A (which it probably will), I assume we would need to do a corrective amendment for A. 

Probably best to amend going forward so that they have the same formula...

Thanks for your input, it is greatly appreciated.

[CuseFan]

If you bring in an NHCE to Plan A such that it passes the RPT of 410(b) on its own then there is no reason to test A & B together, A's PS is safe harbor so no further testing and no gateway.

If the NHCE you bring into Plan A is also in Plan B, be mindful of the aggregation for 415 limits.