401(k) immediate entry - match/PS 1 year wait, dual entry - how do yo

[Guest MEGary]

I have a plan with a 401(k) piece - no eligibility, immediate entry. It also has a match and profit sharing piece with 1 year, age 21, dual entry. I want to set up 2 different plans, one for 4k and one for match/PS (due to the different entry dates). If I do this, how do I test ADP/ACP? The ADP test will have more participants than the ACP. Would I have to manually calculate the multiple use test if needed? Would there be a more efficient way of testing the plan? Let me know if you need further clarification.

Thanks for all information!

[MWeddell]

No need to set up two plan documents. IRS regulations will treat the 401(m) portion as a separate plan for compliance testing purposes from the 401(k) anyway.

If you want to run the 401(k) test without being hurt by early entries, there are two methods. The older regulatory method is to disaggregate the plan into two component plans, one of which covers those 21 or older with 1 or more years of service (with an entry date assumption if desired) and the other of which covers the remaining employees who could have been excluded. The newer statutory method is that you run only one 401(k) test, ignoring NHCEs who are < age 21 or < 1 year of service.

Depends on the software you're using, but you may indeed have to run the 401(k) test separate from the 401(m) test and manually apply the multiple use limit.

[Guest]

Agree with Weddell - perhaps an example will help.

Lets ignore the eligibility issue for a moment. lets say everyone has immediate entry for deferral and match. there is a last day provision however. (or hours requirement for the match).

At testing time, I have a different number of bodies in my ADP test than in my ACP test. I then simply apply the multiple use test and proceed onward to more exciting things.

Now I add a 1 year wait for match. Why should this be any different? My ACP test only includes those people eligible for a match(Including those who deferred 0, of course). I arrive at an ACP %. I now perform the multiple use test. I don't see any reason why to treat things differently than in the case of simply excluding those ees who fail last day provision.

[Guest MEGary]

Thanks for the clarification - I appreciate it!

[Guest WyrickL]

What if the plan in question is a Safe Harbor plan, can dual eligibility still apply? Can a Safe Harbor plan have immediate eligibility with a year wait for match? If so does an ACP test have to be performed?

[austin3515]

The price you pay to get out of ADP/ACP testing is to provide a minimum contribution to all participants eligible to defer.

So the answer is no, you cannot have dual eligibility requirements - one for deferrals and one for the safe harbor match.

Of course if either the safe harbor nonelective contribution or the safe harbor match were provided, then additional eligibility requirements could be attached to the other "non-safe harbor" employer contribution.

[Tom Poje]

see IRS notice 2000-3

question 10

Is a plan required to provide safe harbor matching or nonelective contributions to participants who have not yet attained age 21 and completed a year of service if the plan uses one of the safe harbor nethods?

Answer:

(My abbreviated form)

NO!

the catch is that you must apply 410(B) otherwise excludable testing. that should not be a problem as it is doubtful there would be any HCEs in the one group. Anyone with less than a year can not be an HCE due to comp, so the group would always pass testing unless you had a 5% owner in the group.

[austin3515]

So is the answer to Wyrlicks question yes? You can use dual eligbility requirements?

I didn't know about that! That certainly helps cut the cost of a safe harbor plan!

Thanks

[Tom Poje]

the answer is Yes or No depending on how things are handled.

1. the annual safe harbor notice should indicate that there is an age 21/1 year of service requirement.

(And don't get confused on the 1 year svc - that is only for eligibility, once you have worked that, you are eligible for the safe harbor regardless of hours)

2. you now run 2 tests. those that met statutory requirements and those that didn't.

but wait, under the safe harbor rules, those that met the requirements automatically pass.

but wait, the otherwise exlcudable also pass as there are no HCEs. so technically no test needs to be performed.

now, what happens if you have an HCE that falls into this category. An 18 year old that makes $100,000 (Ha) or an owner's kid.

Remember, the regs from a few years ago allow you to treat these employees as having met the requirements for ADP/ACP testing purposes only. (But NOt for 410(B) - it is a strange scenario!)

[austin3515]

Regarding 410(B) - wouldn't all nonexcludables benefit under both disaggregated portions?

For the 401(k), all employeees are eligible, and therefore benefittin.

For the match, only people who did not meet the eligibility requirements are not participating?

How could you fail 410(B)?

[Tom Poje]

one exception that comes to mind would be a controlled group scenario, where there is a group who is not benefiting. I am sure there are other 'odd' situations that might arise.

But you are correct, generally the plans would pass.

[austin3515]

Tom -

Remember, the regs from a few years ago allow you to treat these employees as having met the requirements for ADP/ACP testing purposes only. (But NOt for 410(B) - it is a strange scenario!)

Are you saying here that even if there are HCE's in the otherwise excludable category that you would not have to run ADP/ACP testing if they're the owners kid?

I thought I remembered reading that somewhere actually (but never found it again), that for years after 1998, the ADP/ACP no longer needed to be run on the otherwise excludables.

One other question- On Schedule T (i.e, coverage), would you have to disaggregate the "two" plans?

If the Plan benefits all nonexcludables I imagine you can still check that 3d box indicating as much?

[Tom Poje]

what you have on the ADP/ACP test is the following:

under the new rules, an HCE who would normally be treated as 'otherwise excludable' is treated as having met the age 21/1 year of service. Therefore, in this example, the owners kid is included in the big test you run. great stuff if he doesn't defer! but because you did this, there are no HCEs in the otherwise excludable group, so there is no need to run the test. that is what you are thinking of.

Of course, you still have the option of using the old rules as well.

as for schedule T, yes you have to disaggregate, and that is where you can end up with an HCE in the otherwise excludable group, and not on the ADP test!

You are correct, you 'might' be able to check all NHCEs benefit, but remember, at that point you might also have 6 'plans'

401(k)

401(k) otherwise excludable

401(m)

401(m) otherwise excludable

nonelective

nonelctive (Otherwise excludable)

and if in one of them an NHCE doesn't benefit, you can't check your box.

[austin3515]

Just curious when that was effective - the "any HCE's" are considered not otherwise excludable? If you don't know, don't worry. I just had a client whose TPA made them fail for just that very reason. It was for the 98 plan year. Was it effective for the 98 year?

Also, what does it mean that you're a moderator? Do you work for benefitslink?

Thanks

[Tom Poje]

the effective date was for plan years after 1998

it was from SBJPA

basically it was worded something like

take into consideration all those employees who have have met the statutory minimums (age 21 and 1 year of service) AND also add in those otherwise excludable employees who are HCEs.

again, you are not excluding or testing separtely any HCEs.

and again, that is an option. you could still test them separately and run 2 tests (if you are out of your mind)

just kidding, there may be a time when you want to do this.

I suppose for example, what if the only new hire was the owners kid and he deferred 15%. I would want to test him separately as an otherwise excludable.

as for the term 'moderator', Dave Baker pays us in compliments.

Dave asked a bunch of different people to sort of keep an eyeball on different boards. I ended up with cross-testing. I can tell you I have learned a lot from the boards. when someone asks a question, I am fool enough to look up the answer just to see if my initial thoughts were correct. Can never stop learning, can you?

and it is obvious you are intelligent to keep asking questions. A sign of a true genius in my opinion. I am usually to shy to ask questions.

[austin3515]

Pensions are like my new hobby. If you've noticed a lot of messages from me, it's cause I'm relaxing on vacation! Pathetic, I know, but it really doesn't take that long to respond...

I've learned more on these boards in the past month than on the job for a year! It's cool to hear everyone else's problems!

The title of moderator is well deserved. Thanks for all your question answering.