Aggregate Testing for 401(k) Plans under same employer

An employer wants to have 2 separate 401(k) plans to exclude a certain class of people from receiving a profit sharing contribution. So let's say Plan A and Plan B. Plan A will exclude participants that will be in Plan B, Plan A will have the owners maxing out their 415 limit as well as paying some staff 10% PS and the rest enough to meet minimum gateway. Plan B will have only a specific class of employees with identical eligibility, but the employees that have met the service requirement will get a 3% SH contribution only. 

Will the plans need to be tested aggregately for gateway? Or will just passing 410(b) suffice? I'm seeing if it's worth it for the company to have 2 plans or just have 1 plan.

Whatever would become required or permitted about coverage and nondiscrimination measures:

Could the employer’s goal be met by providing one plan with as many benefit structures as are need for all the allocation differences?

7 minutes ago, Peter Gulia said:

Whatever would become required or permitted about coverage and nondiscrimination measures:

Could the employer’s goal be met by providing one plan with as many benefit structures as are need for all the allocation differences?

Both plans pass 410(b) testing on its own, but not aggregately if the client wanted to have their cake and eat it too. The employer's goal is to not have to provide a profit sharing contribution to a certain group of employees (fall under the same class) but wants to allocate profit sharing to themselves and a few other employees that they specifically want to retain belonging in different classes.

Since both plans will have the same plan sponsor, each plan will have to consider in its coverage testing non-excludable employees (particularly employees who meet the eligibility and participation requirements for a benefit, but who are excluded based on classification).  It doesn't make any difference from a testing standpoint whether there is one plan or two.  It may make a difference if the one plan approach would require an audit, but each of the two plans will not.  It also may make a difference if the employer does not want to communicate to all employees all of the benefit provisions that it want to provide to the different classifications of employees.

Keep in mind that coverage testing using the ratio test is done by type of contribution (elective deferrals, match, and non-elective employer contributions), and coverage testing using the average benefits tests is done based on benefits (assuming the plan passes a reasonable classification test or nondiscriminatory classification test).  These additional testing steps can complicate the best of intentions.

Keep in mind the complexity of administration and of testing in any design.  If the plan sponsor must be able to administer the plan or plans, or they could pay a steep price to correct operational errors.  One of the most error prone situations is when employees change classifications during a plan year.  This leads to some benefit accruals under each plan and the plan needs to have tight definitions for plan compensation and for eligibility service, vesting service and benefit accrual/allocation conditions.

Thanks for the tip. There won't be any classification changes during the year as it will be consistent throughout. The one plan approach will not require an audit as it is still considered a small plan. Both plans will have the same definition of plan compensation, eligibility, vesting and ownership. Here is the breakdown:

Plan A: 2 HCEs, 9 NHCEs (wants 3% SH + PS for all eligible employees)

Plan B: No HCEs, 11 NHCEs (wants 3% SH only for all eligible employees) 

My concern is to ensure there is no operational failure and to see if 401(a)(4) testing is needed aggregately. Do you see any issues that I will need to be aware of? Or am I good since the plans pass 410(b) testing independently?

If an employer prefers that an employee not read what benefits a plan provides for other classes of employees:

The Labor department has interpreted ERISA §§ 102 & 104 to allow different summary plan descriptions for different classes of employees.

29 C.F.R. § 2520.102-4 https://www.ecfr.gov/current/title-29/section-2520.102-4.

Plan A coverage = (9/20 NHCEs) / (2/2 HCEs) = 45%

Plan B has no HCEs covered, so plan B coverage is an automatic pass, and we assume it has the same safe harbor as plan A to allow aggregation with plan A if necessary to get plan A to pass coverage.

Plan A’s 45% result is greater than the safe harbor percentage for coverage, which is 27.50% based on the concentration percentage, but it’s less than 70%. So without aggregation of plans, the average benefit test for coverage is necessary.

Does plan A satisfy the nondiscriminatory classification test of 1.410(b)-4? Meaning, does it cover a reasonable business classification?

If not, and you aggregate the two plans to get plan A to pass coverage, you must now also aggregate the two plans for purposes of nondiscrimination testing, and if allocations are tested on a benefits basis (cross-tested), then the gateway minimum allocation does apply. Shut you want plan A to pass coverage without aggregation with B so you can avoid the gateway in B.

If you do have a reasonable business classification defining who is covered by plan A, then you run the average benefit test. You can run that on a benefits basis or on a contributions-basis. You need that to be 70%, and if it is, then Plan A passes coverage without aggregation with plan B, and no gateway applies to Plan B even if Plan A is cross-tested.

If you put it in the sense that Plan A covers 9/20 NHCEs rather than 9/9 NHCEs, then I had the feeling it wasn't going to pass gateway or average benefits test. That was originally what I thought.  Thanks

If I had a nickel for every takeover where the coverage testing had only considered the employees eligible for the plan instead of all the employees of the Employer under 414(m) etc., I’d have a bag full of nickels.