Related employers - NOND testing, mandatory aggregation, permissive ag

[James Matt Ullakko]

Here is an outline of the surrounding issues:

In dealing with permissively aggregating three plans together in order to satisfy NOND testing. Assume that the plans are all designed the same with matching benefits, rights, and features...

Three members of a control group Plans A,B,C.

I assume that mandatory aggregation is applicable here for the HCE's and NHCE's combining eligibility and all the rest, which could increase the count for NHCE's.

I don't understand how the HCE's would look on paper. Meaning, assume an employee is considered an HCE based upon 5% owner. This person has comp of:

Plan A $40,000 defers - $2,000.00

Plan B $100,000 defers - $5,000.00

Plan C $20,000 defers - $1,000.00

When looking at this person under permissively aggregation scenario would the following be true?

The person would be an HCE and counted one time on the aggregated test. The comp would be totaled and the deferrals as well? 160,000 and 8,000 giving 5% deferral%?

How would this look if mandatory aggregation was applied to these plans being tested separately? Any way to avoid combining comp/deferral amts. for the HCE's?

Thanks for any help!!!!!!!!!!!

Matt

[MWeddell]

You've got 3 related issues to untangle:

1) All 3 members of the controlled group are considered a single "employer" for testing purposes, so employees of all three are in the denominator of ratio percentages when you do coverage testing.

2) You permissively may aggregate 2 or more plans. In other words, you may elect to treat them as a single plan for testing purposes. If this is required, then it's usually called mandatory aggregation. Plans must be aggregated or disaggregated in the same manner for 410(B), 401(a)(4), top-heavy, 401(k), and 401(m) testing.

3) If you test the plans separately, then Reg. 1.401(k)-1(g)(1)(ii)(B)(1) contains a special rule aggregating HCE deferrals to all plans for each of the plans' testing. A similar rule applies to 401(m) testing.

Now I'll comment on the rest of your posting.

Realize that it's a big assumption that all plans have the same benefits, rights, and features. With different investment choices, different withdrawal options, loan conditions, etc., unless the plans were intentionally set up to be clones of each other, it's highly unlikely that your 3 plans have the same benefits, rights, and features.

Nothing that you've told us leads me to believe there is mandatory aggregation, i.e. nothing that requires that the 3 plans be treated as 1 plan for testing purposes.

For your hypothetical HCE, $8,000 of deferrals must be included in all three plans' testing if you are testing each plan separately. Whether all $160,000 of compensation is included is unclear. Sometimes these tests are run so that only compensation during the portion of the plan year in which an employee was eligible to defer is included when computing actual deferral ratios, which may mean that less than $160,000 is included.

Permissively aggregating all plans together generally is what is needed to avoid aggregating the HCE deferrals for each test. Another possibility is if one of the 401(k) plans is an ESOP, but there's nothing in your post to indicate that.

[James Matt Ullakko]

Thank you so much for your reply.

I do have a few follow-up questions:

First of all, sorry for my lack of knowledge, this inquiry is the result of ASC's compliance testing software not combining the deferrals and eligible comp. for a particular HCE - when aggregating each plan together for testing purposes.

Instead, this one HCE shows up twice on the HCE listing erroneously reducing the ADP for the HCE's. I wanted to make sure that I edited and combined, the comp and deferral amts., from each plan this particular HCE participated in correctly.

I copied in your comments and put a question after...

1) All 3 members of the controlled group are considered a single "employer" for testing purposes, so employees of all three are in the denominator of ratio percentages when you do coverage testing.

- I am clear on this.

2) You permissively may aggregate 2 or more plans. In other words, you may elect to treat them as a single plan for testing purposes. If this is required, then it's usually called mandatory aggregation. Plans must be aggregated or disaggregated in the same manner for 410(B), 401(a)(4), top-heavy, 401(k), and 401(m) testing.

2Q(1) I can see that you must have the same set of HCE's for coverage and non-discrimination testing.

2Q(2)However, I am still unsure when permissively aggregating 2 or more plans, if the deferral amts. and eligible comp. from each plan the HCE was eligible for are combined(irrespective of whether or not the HCE actually contributed) - I would assume that eligible comp. and deferrals are added together from each plan the employee was eligible to contribute. Is this correct?

3) If you test the plans separately, then Reg. 1.401(k)-1(g)(1)(ii)(B)(1) contains a special rule aggregating HCE deferrals to all plans for each of the plans' testing. A similar rule applies to 401(m) testing.

3Q(1)- Is the eligible compensation from each deferral arrangement the HCE is eligible to defer also combined?

3Q(2)- Can you clarify the exception to Reg. 1.401(k)-1(g)(1)(ii)(B)(1) where combining the deferrals (and eligible comp. amts?) to calculate an HCE's deferral % under each arrangement does not apply, if the arrangements are part of plans that are disaggregated under the coverage rules. I am interpreting this to mean if you disaggregate "otherwise excludable employee's" for coverage and of course for all other tests as required to maintain consistent HCE population, then you can avoid having to combine deferral amts. in a related employer situation...

Not so sure I'm understanding this exception at all...

Thanks,

Matt

[MWeddell]

Matt,

Sorry I didn't notice your second post until receiving your e-mail.

2Q(2) - I think your interpretation - that one should aggregate each individual's deferrals and compensation to produce one combined actual deferral ratio for that individual - is the best interpretation, but the regulations are not clear on this point.

3Q(1) - Again, I think your interpretation - that one includes not just deferrals but also compensation earned while eligible for both 401(k) plans - is the best interpration, but the regulation is not clear. There's an example in the regulation (I cited the regulation in my prior post) that doesn't help much.

3Q(2) - The exception only applies to when you are not allowed to aggregate the two 401(k) arrangements. The example in the regulation is where one 401(k) is an ESOP and the other is not an ESOP. If you are merely choosing to run the two plans separately, you still must use the special HCE only aggregation rule.

-- Michael Weddell

[James Matt Ullakko]

Thank you Michael!