Carving out "otherwise excluable" in General Test.

[Guest lforesz]

I am performing a cross-test, including contributions under a money purchase pension plan and profit sharing plan. I've run the test excluding benfitting employees with less than the statutory 1 YOS and/or age 21 from the rate group and the ABT. I am trying to find guidance on this in the regs. There are no HCEs in the "otherwise excludable" group so this part is passing 401(a)(4) and 401(B) automatically. Is this considered a "component plan" and is that why I am able to carve this group out of the main test?

[AndyH]

If I understand the rules correctly, with some help from Tom Poje of this board, you can't do this in the manner you've indicated.

I think you could do it by treating it as a separate component plan, as you suggested, but in such case I think each component needs to have a ratio percentage of 70% or higher, but this wouldn't be a problem if your otherwise excludable group is less than 30% of the total (assuming you have no HCEs in that component).

I suppose it could, but in many cases it would not help your test, since the second component plan most likely includes the youngest people who are most likely to help the test.

Tom, do I have this right? You can wait till after 3/15!

[Guest]

In the strictest sense I think the term 'component plan' refers to a different concept.

you are talking about 1.410(B)-7©(3) Plan benefitting otherwise excludable employees.

You are able to carve this group out because your plan was more generous than it had to be. In other words, if your plan used age 21/1 year of service, these 'carved out' people wouldn't have been in there in the first place.

if your profit sharing plan has a 401(k) feature, you must also test separately.

(Andy over rates me, but I will take the compliments anyway!)

[Guest Doug Goelz]

I agree with Tom's comment on being able to just carve the "Otherwise Excludables" out of the testing of the PS plan. However, as far as this mandating that this requires carving them out of the testing of the 401(k) portion of the plan, I'm struggling with. I realize that it would probably be more beneficial to do this. But, if anyone knows of a code or reg section to support this, I would appreciate knowing it.

If this were true, it would follow that if you had the situation where you carve out your "Otherwise Excludables" from your 401(k) testing, you would have to not include them in your 401(a)(4) general testing of the PS contribution. I've always felt these portions of plans are treated as their own separate plans that each have access to the various testing options.

[AndyH]

Just to clarify this, is the following correct for a K plan with a PS component?:

1. The ADP and 410(B) testing of the deferrals must consistently test all together or consistently disaggregate the excludables.

2. This does not require consistent treatment of the PS contribution because that's a separate "plan". But, if the excludables are disaggregated for 410(B) testing of the PS component, the same treatment is required for a(4) testing, and vice versa.

Are we in agreement on that? I know we've discussed this before, but I'm not sure if that's what we agreed upon or not. The regs in this area could be much clearer.

[Guest]

I would say true, but an odd quirk with point 1.

Under the new rules, the ADP test can be performed excluding all NHCEs w/o 1 yr svc/age 21. No such rule applies to 410(B). In other words, you could end up with HCEs in the 410(B) otherwise excludable test and not in the ADP test. I can't imagine that hurting anything, unless possibly on the the 401(m) side if there is a last day rule for match.

[AndyH]

Thanks Tom. Doug, are you in agreement with this? If so, maybe we can get somebody to legislate or regulate this in plain English!