"Elective" disaggregation and impact on 401(a)(4) testing.

[AndyH]

This may be a dumb question, but I'm having a brain cramp.

If the profit sharing portion of a 401(k)/ps combination plan is cross tested for (a)(4) purposes, and it excludes "otherwise excludable employees" (minimum age/service) for ADP testing, does this require the same treatment for cross testing (i.e. excludable HCE's in the (a)(4) test but excludable NHCE's out)?

[Guest]

you lost me on the example. 'excludable HCEs in the (a)(4)test?'

here is how I understand things. Before even getting to the ADP test, I perform the 410(B) test.

And I can include/exclude 'otherwise excludable employees'

No matter what, if I exclude them from 410(B), then I MUST exclude them from my other tests.

However, under 410(B), I actually have 3 'plans' if you will - 401(k), 401(m), and 401(a).

my understanding would be that the 'otherwise excludable employee' rule applies to the 'plan' and thus, I guess, though I could be wrong, you could perform 'excludable' on the 401(k) plan but not on the 401(a). Bizzare.

one further note, the new regs regarding 'excluding NHCEs with less than 1 year/age 21' from the ADP test - this applies to the ADP test only. there is no similar rule for 410(B). Thus you can have an HCE with less than 1 year treated differently for the ADP test than for the 410(B) test!

clear as mud

[AndyH]

Tom, sorry but I'm a little late re-focusing on this. Can I try to make sure I understand, since in my world, the ADP test is done first, by someone else, then the 401(a)(4) test later, which I get involved in. But, now, the K testing people are asking me if they should consider their testing method in light of step 2, the 401(a)(4) test.

I think what you're saying is that whether or not the ADP or ACP test was done using permissive disaggregation (separately testing excludables) has no impact on the method used to test for 401(a)(4) on the profit sharing component. In other words, this does not mandate component plan testing. It would, however, require that the same methodology be used for the 410(B) test of the K plan component.

Similarly, excluding "otherwise excludable" NHCE employees from the ADP test has no effect on the 401(a)(4) test of a 401(k)/profit sharing plan subject to general testing.

Do I have that right? Anybody disagree? Thanks.

[Guest]

that is the way I understand it. (I could be wrong!)

or put another way, i have:

401(k) = ADP test. if I statutory exclude, I do the same for 410(B). Actually, if you want to get technical, it is the other way around - 410(B) is done first, but in reality

since its an option, its a moot point. Chances are you will pass 410(B) no matter what you do, but passing the ADP test may be harder, so you do that first and then decide how you handle 410(B)

401(a)(4) if the equivalent of the ADP test. it is simply the profit sharing test rather than the deferral test. It is its own plan, so to speak.

by the way, watch out in testing under the new regs in regards to ADP and 410(B). There are some strange rules out there. The new regs says you can exclude all NHCEs with less than 1 year separately (HCEs with less than 1 year are treated as having more than 1 year) But this does not apply to the 410(B) test! so I don't believe you can do the same thing under 401(a)(4)

[AndyH]

Tom, thanks much.