FAQ 330: 401a4--Excluding certain employees from the 401a4 test


I am working on a proposal for a doctor where two plans will be used. The first plan will be a straight profit sharing with 3 key/HCEs in it and NHCE's who are clerks, the second will be a 401k only plan with one key/HCE in it and NHCE's who are pharmacists. For 2005, the 401k plan will not be in effect yet and the proposal will be for just the profit sharing plan in 2005. Both plans pass
410(b) on their own. In order to do the 401(a)(4) testing in ASC, the rate group test should only be based on the employees in the profit sharing plan and if they don't pass the 70% test, then the Average Benefits Percentage Test is to be based on all employees with the employer. I have tried two methods, first segregating the employees into separate plans and running the 401(a)(4) testing by aggregating the plans. The second way was having all employees in the plan, setting the ones who belong in the 401k plan as excluded and then running the 401(a)(4) test. In both circumstances the rate group test is including the employees in the 401k plan. We have double checked the regulations and found that if the plans can pass
410(b) on their own, then the rate group test should exclude the employees in the 401(k) plan, but if they do not pass the 70% test then they need to be included in the Average Benefits Percentage Test.


If it is multiple plan coverage only (i.e. not a new comp allocation, just trying to pass 410b), the rate group testing is not applicable. You should print a4 selecting "0-No method selected (coverage only)" and the rate group information would not even print. If it is a new comp design so rate group testing is required for the allocation, then you can code them a status I to exclude them from the test altogether. (Status I is not on the test at all. Status E counts as 0%, hurting the test.)
Another option, and I'm not sure this would work for you, is to run only from 1 plan, using the "Additional Counts" button on the a4 setup. You would enter the counts here, but they will be treated as status E. The rate group testing will try to pass 70% first, if it does, it "stops" with an N/A in the Avg Ben Pct column. If it doesn't, it goes on to Average Benefits Percentage testing, including all relavent participants from all cases in both calcs. It is not designed to do this step differently based on multiple plans.