Two 401(k) Plans Under Common Ownership – 410(b) and ADP Testing

[notapensiongeek]

Company A and Company B each sponsor their own 401(k) plan. Both entities are owned 50/50 by Tommy and Cooper. Both plans have the same plan year (fiscal year-end), testing method (current year), and neither is a safe harbor plan. No employer contributions are made to either plan for the year in question.

Plan A:

• Participants: Tommy and Cooper only (the only employees/participants)

Plan B:

• Tommy and Cooper are employees of Company B (and eligible participants in Plan B) but do not make elective deferrals. 

• There are 16 HCEs total (including Tommy and Cooper)

• There are 79 NHCEs eligible to participate (2 are otherwise excludable, 77 are not)

How are these plans required to be tested for 410(b) coverage and ADP testing?

Specifically:

• Are the two plans required to be aggregated for testing purposes due to common ownership/controlled group rules, or may they be tested separately?

• If aggregation is required, how does that affect coverage and ADP results in this fact pattern?

• If separate testing is permitted, under what circumstances would that apply?

• Are there any other issues or traps in this structure that we should be aware of?

Thanks in advance for any insight.

[Bri]

Well, even if you wanted to test them separately, Plan A has a 0% NHCE ratio (you do have to measure the entire controlled group's population) so you're going to have to aggregate them, first and foremost.

[CuseFan]

Yes, must aggregate for A to pass coverage which means you must also aggregate to test nondiscrimination.

[BG5150]

FWIW: I agree.

[notapensiongeek]

Thank you all for your input.

So this is not a permissive aggregation situation; aggregation is required.  Is that correct?

[BG5150]

Yes.  Because the first plan does not pass coverage on its own.

[rocknrolls2]

Prior to the acquisition of the sponsor of Plan B, I question how (unless the owners were the  only employees), Plan A was able to pass coverage. In this context, the best solution going forward would be to urge the client to merge the plans.