Shifting Question - 403b for HCEs and 401k for NHCEs

HCE's participate in the 403b plan to avoid the ADP test. All employees are eligible for a match and we're failing ACP Testing.  Someone in the office asked "can we shift deferrals to the ACP Test".

Any Seinfeld fans out there - "You just blew my mind."  Because of course the only deferrals in the ADP test for this plan are for NHCEs so I can shift 100% of the deferrals to the ACP test which will basically exempt this plan from ACP testing.

Aside from the sheer obnoxiousness of this really cool idea (I might be terrified to do it in practice), what is to stop me?

Why not just match the HCE's in the 403(b) (only HCE's are eligible, I assume)?  I do not  understand the "shifting" idea.  Please see the discussion from "Ask the Experts" attached below regarding excluding employees of a Tax-Exempt org who are eligible for a 403(b) from testing in the same sponsor's 401(k). Treas. Reg. 1.410(b)-6.

Patricia Neal Jensen FuturePlan 403(b)

Sponsor has 401k and 403b Ask the Experts.docx

Thats what I'm doing, HCE's in 403b.  But I have to aggregate the match in one ACP test.

In order to shift I can shift deferrals from ADP to ACP if I can pass the ADP test before and after the shift.  I can shift 100% of the NHCE's deferrals to the ACP test and still pass the ADP test becase no HCE's have 401k.  It's really a very interesting question.

Reminder, shifting no longer requires passing before, only after the shift.

Go for it!

Definitely needs to pass before and after. If not passing before, you need to shift deferrals for HCEs as well as NHCE's. Perhaps that is what you are referring to.

Do not have to aggregate the match into one test.  Please read the attachment to my earlier reply.

The IRS already thought of this ploy.  See Treas. Reg. §1.401(m)-2(a)(6)(ii): "Elective contributions may be taken into account for the ACP test only if the cash or deferred arrangement under which the elective contributions are made is required to satisfy the ADP test in § 1.401(k)-2(a)(1). . . ."

Tom Veal, ERISA Cavalry PLLC

5 minutes ago, Tom Veal said:

The IRS already thought of this ploy.  See Treas. Reg. §1.401(m)-2(a)(6)(ii): "Elective contributions may be taken into account for the ACP test only if the cash or deferred arrangement under which the elective contributions are made is required to satisfy the ADP test in § 1.401(k)-2(a)(1). . . ."

Interesting.  One could argue I am subject to the ADP test, there just are no HCE's, however,  I did begin this thread under the premise that something has to make this not allowable and I think you've given me something to point to!

2 hours ago, Patricia Neal Jensen said:

Do not have to aggregate the match into one test.  Please read the attachment to my earlier reply.

That article is about a wholly owned for profit subsidiary sponsoring a 401k, which is not the same topic.  This is a 501c3 who has chosen a 401k plan for it's employees, and uses a 403b just for the HCE's to avoid the ADP test.  

Here's the entire section quoted above.

(ii) Elective contributions taken into account under the ACP test. Elective contributions may be taken into account for the ACP test only if the cash or deferred arrangement under which the elective contributions are made is required to satisfy the ADP test in § 1.401(k)-2(a)(1) and, then only to the extent that the cash or deferred arrangement would satisfy that test, including such elective contributions in the ADP for the plan year or applicable year. Thus, for example, elective deferrals made pursuant to a salary reduction agreement under an annuity described in section 403(b) are not permitted to be taken into account in an ACP test. Similarly, elective contributions under a cash or deferred arrangement that is using the section 401(k) safe harbor described in § 1.401(k)-3 cannot be taken into account in an ACP test. In addition, for plan years ending on or after November 8, 2007, elective contributions which are not permitted to be taken into account for the ADP test for the plan year under § 1.401(k)-2(a)(5)(ii), (iii), (v), or (vi) are not permitted to be taken into account for the ACP test.

Belgarath, are you seeing something that covers this scenario perfecty?  I still think someone who is not as risk averse as me could point to that and say "yup, I check off all the boxes!".  Simply having no HCE's doesn;t mean the plan is not required to satsify the ADP test in my opinion.

Again I would never ever do this because it's way too aggressive...

I haven't spent any time thinking about it in-depth, but on the surface, I'm inclined to agree with you.

Respectfully suggest reading Treas. Reg. Sec 1.410(b)-6.  A 501(c)(3) adopting a 401(k) and a 403(b) was a reasonably common design a few years ago for this reason.

Bracketed/bolded text text is me.  This is the text from the reg you cited.  Really (3) is what is most relevant.  Again, this reg, and the article you cited are not related to my approach, they're about something completely different.

(g) Employees of certain governmental or tax-exempt entities

(1) Plans covered. For purposes of testing either a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, an employer may treat as excludable those employees described in paragraphs (g)(2) and (3) of this section.

(2) Employees of governmental entities. Employees of governmental entities who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees if more than 95 percent of the employees of the employer who are not precluded from being eligible employees by reason of section 401(k)(4)(B)(ii) benefit under the plan for the year.

(3) Employees of tax-exempt entities. Employees of an organization described in section 403(b)(1)(A)(i) [i.e., a tax exempt 501(c)(3)]  who are eligible to make salary reduction contributions under section 403(b) may be treated as excludable with respect to a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, if -

(i) No employee of an organization described in section 403(b)(1)(A)(i) [again this means a 501(c)(3) tax exempt entity] is eligible to participate in such section 401(k) plan or section 401(m) plan; and

      [This requirement is not met in my scenario.  ALL of the employees except for the HCE’s are eligible to participate in the 401(k).]

(ii) At least 95 percent of the employees who are neither employees of an organization described in section 403(b)(1)(A)(i) nor employees of a governmental entity who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) are eligible to participate in such section 401(k) plan or section 401(m) plan.