Coverage for controlled group with separeate plans

[MR]

OK, got a controlled group question. Two companies, two plans. Each must pass coverage in order to be tested separately. Company 1 has 3 HCE's plus the owner and Company 2 has 2 HCE's plus the same owner. The owner is an employee of both companies and lets say he makes $50K at each. Both companies make a profit sharing contribution, but the percentages of pay are different. My question is this - what is my percentage of HCE's benefitting under each plan? I have 4 HCE's getting a contribution in plan 1 and 3 HCE's getting a contribution in plan 2. Bearing in mind that one of the HCE's is the same person, is my coverage in plan 1 equal to 4/7 and 3/7 for plan 2? Or, because the same HCE benefits in both, are the coverages 4/6 and 3/6, respectively?

Any references would be greatly appreciated.

Thank you.

[Guest]

I would go with 4/6 and 3/6. I don't think your scenario is any different logically than one company having 2 plans - one for everybody and then another just for the owners. you aggregate for testing but don't 'double count' bodies that are the same. Or, suppose the company simply has two plans for everybody. would you aggregate and count everybody twice?

a controlled group is treated as having one employer, so I would treat the same.

[MR]

Tom, I agree with your logic, but what about the fact that the sum of the numerators exceeds the denominator? Strictly from a math standpoint, I guess I have a problem with this. If all HCE's are covered, the combined coverage percentage exceeds 100. This would seem to require an unneccessarily high level of coverage among the NHCE's in order to pass, no?

[Guest]

I am not quite sure the sum of the numerators exceeds 100 since one ee is in both.

In other words, if I was to aggregate the plans instead of having 2 tests at 3/6 and 4/6 I would have one test at 6/6.

and how dare you associate the beauty of math with IRS rules and the like.

[MR]

Bravely going where no man has gone before...

We're not aggregating the plans, which is the source of my problem. If I use 4/6 and 3/6, then the percentage of NHCE's benefitting would have to be 70% of these percentages in order to test separately. 70% of 4/6, plus 70% of 3/6 is more than 70%. This seems wrong (again mathematically)

[Guest PLHart]

Why are you adding them up anyway? For company # 1, all you need is 70% of 3/6, or 35% of total NHCE's to be covered to pass. In company # 2, you need 70% of 4/6, or 47% of total NHCE's to be covered to pass. Remember, you are still testing each plan separately, although you must count total employees of controlled group in that testing.

I don't think the fact that 35% plus 40% is greater than 70 bears on anything...

[MR]

I think it does matter that 35% plus 46% exceeds 70%. Suppose, for example, all six (or7) HCE's benefit in my disaggregated plans. Suppose further that 40% of the total NHCE's benefit from each plan. In other words, 80% of the total NHCE's benefit. If I use your logic, the plan with 4 HCE's does not pass coverage, since 40% is less than 47%.

To me, this doesn't seem fair, but perhaps that's not the point.

[david shipp]

Let's get back to basics.

The coverage fraction is the number of HCEs (or NHCEs)benefiting under the plan over the total number of nonexcludable HCEs (or NHCEs) in the controlled group.

In MR's case there are 6 HCEs in the controlled group. The applicable fractions are thus 3/6 and 4/6.

This requires NHCE coverage percentages of 35% and 46.6% respectively if the plans are to stand alone. If each plan is to stand-alone, it is tested alone and the results are not aggregated in any way, even philosophically.

If either plan fails to meet the required coverage percentage, it can't be a separate plan, even if aggregated coverage exceeds 70% 'cuz aggregation doesn't count in stand-alone testing.

[Guest PLHart]

Thanks David, that is what I feably attempted to communicate in my prior message...