Can the shareholder-doctors' plan have a matching contribution if the

[dmb]

I have a client which is a group of Doctors. this group of Doctors employes 200 or so employees through a leasing company. The Leasing company provides these employees with a 401k plan. The Doctors set up two plans. One 401k plan for themselves and a Cross Tested PS plan for everyone. The question is: If the Leasing company doesn't provide a match in their 401k plan, can the Doctors provide a match for themselves in their 401k plan??

[Guest Mr. X]

If the plans cannot pass coverage on their own they will need to be aggregated for this and 401(a)(4). I am betting that if one plan only has a group of doctors, enough of them are HCE's to not allow that plan to pass coverage on its own.

Therefore, since you now need to aggregate plans for 401(a)(4), there is probably little chance they will pass the ACP test. So the end result is yes, you can do it, but you can also plan on returning all or most of the dollars each year.

[alanm]

Not only is X right, but leasing doesn't get the Docs out of considering the leased employee their common law employees. The plans have to be aggregated for testing and they probably have a problem.

[Guest Mr. X]

I was thinking a bit more on this and would like to revise my answer. I do not think that there necessarily will be a problem with passing the ACP test, as those who are excluded from the plan will not count in that test at all. The problem will arise, however, with 410(B) where those who are not counted in the plan will most likely cause the plan to fail coverage in the situation given. Therefore, the match will not have to be returned, but rather, additional participants will be required to receive the match.

[Richard Anderson]

Mr.X

If the 401(k) plan fails coverage (which, as you point out is likely to be the situation), won't the cure be QNECs to the NHCEs, since they were not allowed to defer. And then, I assume the cure for failing 401(m) coverage would be a match on the QNECs?

Now, after "fixing" coverage, will those NHCES who received QNECs and match be in the ADP/ACP test?

[Guest Mr. X]

Richard,

I don't think that the 401(k) plan would fail coverage since the leased employees are in a 401(k) plan of their own.

Also, let me add this to clarify. My first response assumed that the leased employees' plan had a 401(m) feature, but no one was getting a match. My second reponse assumed that there was no 401(m) feature in the leased employees' plan.

Lastly, anyone who did receive a QMAC would be in the 401(m) test.

[dmb]

Just to update....the leasing company's plan does have a match and the plan passes coverage from all sources.

[Guest Mr. X]

I am kind of going around and around in my head on this and would be curious how others would treat this situation. With the leased employees having a matching feature in their plan but getting no match, would you A) include them in the 401(m) test at 0%; or b) treat them as not benefitting, exclude them from the test and potentially fail 410(B).

The more that I talk to myself on this, the more I lean toward b).

[dmb]

Oh, i guess i forgot to mention that the recipient employer contributes the leasing match.

[Guest Mr. X]

Well then problem solved for you. You will still need to aggregate the plans for testing. Also, make sure that the rate of match is not higher in the doctors' plan as that is a BRF.

[dmb]

I have aggregated for testing. Thanks for all your input.

[Richard Anderson]

If the leasing co. and recipient co. plans are aggregated for coverage; wouldn't they have to be aggregated for ADP/ACP testing? That is, if the k portion of the plan is aggregated for coverage, then the k portion of the plan must be aggregated for non-discrimination testing. Same for the m portion of the plan.

This seems to be in agreement with the first post of Mr. X. But, I see the correction for a failed ADP/ACP test in this situation to most likely be distributions of excess contributions and distributions of excess aggregate contributions. Mr. X's second post seems to disagree with this.

If the k and m portions of the plans must be aggregated for ADP/ACP testing, then, the doctors should defer and match in their 401(k) only up to the amount that will pass testing. The remainder of their contribution should come from the cross-tested profit sharing plan. It would not make sense to max out 415 limits to the doctors using high deferral and match contributions, just to have to turn around and distribute a portion of those contributions.

[dmb]

I aggregated plans for ADP and ACP as well. Passes both with flying colors (as well as MU test)

[Guest Mr. X]

Richard,

We all agree that if the plans are aggregated for coverage, they are aggregated for nondiscrimination testing. See my fourth post and tell me your thoughts on that.

[Richard Anderson]

Mr. X

I don't think it would be A or B, but both A and B.

A) Anyone who has met the conditions, if any, (1000 hours, last day, ect.) for the match contribution should be included in the ACP test. To be in the ACP test they must be eligible for the match. If the match is zero, then they are in the 401(m) at 0%.

b) Anyone who is a plan participant (met eligibility for the 401(m) portion of the plan) is included in the 401(m) coverage test. Therefore, they are in the coverage test as not benefiting. You can of course, disaggregate for statutory eligibility.

Treating them as not benefiting for the coverage test would not affect the ACP test. The two tests (coverage and non-discrimination) are looking at two different things. The coverage test looks at whether the plan is benefiting enough NHCEs, relative to the HCEs. The ACP test then looks at whether the amount of benefit to the NHCEs is discriminatory. In this case you fail both.

[KJohnson]

I thought there had to be a unity between the two. 1.410(B)(3)(a)(2) says that an employee is benefiting under the 401(m) portion of the plan for 410(B) purposes only if the employee is an "eligible employee" under 1.401(m)-1(f)(4). Under 401(m) you only consider "eligible employees" in your ACP test.

Therefore I would think they would either have to be benefiting and in ACP or not benefiting and out. Based on the definition of "eliglble employee" I would think that it would be the former. The employees would be "eligible to receive" a match even though one was not made for the year. However, I think arguments could be made for going the other way.

[Richard Anderson]

KJohnson

You are correct. However, I find the result difficult to believe.

An employer sets up two 401(k) plans. Plan A has only HCEs and provides a 100% match. Plan B has only NHCEs and provides 0% match. Everyone in plan A and plan B is eligible for a match, so when aggregated, the ratio % for 410(B) is 100%, since everyone is benefiting (eligible for a match), even though no match was allocated to the NHCE plan.

I guess that the above result does not allow any abuse, since the plan could not pass ACP, or Benefits, Rights, and Features a4 testing.

Since only participants who are eligible to receive a match are in the ACP test and those who are eligible for a match are benefiting, I now see the reason for the A or B choice in Mr. X's post.

I now think that A is correct; they are benefiting and in the ACP test at 0%.

Thanks Mr. X and KJohnson for the posts; I definitely learned from them.

[Guest Mr. X]

I too have learned from this thread and I follow the logic of KJohnson's and Richard's posts. However, what if the leased employees' plan did not have a 401(m) feature? Then I think we would all agree that they would not be counted in the 401(m) test. To me, not making a match for the year is effectively the same thing, yet it yields quite different results in the opinions of the prior posts. Is it just me, or does that not make sense?