| FAQ 355: 401a4--Cross tested plan fails ABPT but passes ABT. Why? |
Here is a plan that I am having trouble with and can't understand the results of the 401a4 tests.
It is currently run at 5.75% of pay for group 3, the staff, and a flat dollar amount that equates to 10.61% for the owner. This WILL pass 401a4.
If you drop the group 3 rate to 4%, it fails 401a4.
The surprise to me is that the failure at 4% gives "b" and "c" as the reasons. This has, in the past, indicated that either (1) it fails minimum gateway (which this case does not comparing 4% to 10.61%) or (2) the average of the NHCEs is less than 70% of the average of the HCEs.
In both cases (5.75% and 4%) the average of the NHCEs is more than 70% of the HCE for ABT and, also in both cases, the average of the NHCEs is less than 70% for ABPT.
The problem hinges on the HCE accrual rate of 4.93%. In both cases, the plan fails the ABPT, which includes all sources of money--not just profit sharing (which passes, by the way). When the NHCE's are at 5.75, 3 of 4 of them have accrual rates higher than 4.93%, so the general test passes at above 70%, or 75%. This means the failing ABPT doesn't matter. However, when the NHCE's drop to 4%, only 2 of the 4 are over 4.93% accrual, giving the plan 50% on the general test. When the general test percentage falls below 70%, the ABPT kicks in. Because the ABPT fails, the test fails.