401k - 2 plans?

As our company looks to try to minimize the negative impact not passing our non-discrim test has on our HCEs, one suggestion that was thrown out by someone is, can we have two seperate 401k plans?

One for our largest division (the division that has no high comped but a large number of non-participants, this divison is the primary reason we fail our non-discrim tests) and one plan for our other divisions and corporate. Possible? If it is, what problems am I going to run into.

And if it is possible, then it would seem to me that it's a way to get around the non-discrim test for any company that has the same problem - which kind of defeats the entire purpose of doing the non-discrim testing.


  • 6 Comments sorted by Votes Date Added
  • I'm no financial guru but what advantages or concessions would you make in the 2nd plan that would entice your lower paid EEs to participate?

    If they can't or won't contribute to Plan A, I can't imagine they would be able to contribute to
    Plan B.
  • The thinking is that it won't matter because they're in a seperate plan. If there are no HCE's in Plan B then the thinking is that Plan B would pass the non-discrim test. No HCEs=no discrimination.

    Plan A would cover all the other divisions which would include our HCEs but which also has a lot of participation by non-HCEs so the chances of passing are greater (or at least the risk of having to return contributions would be far less then today).

    Each plan would be tested seperately, right? Or am I missing something and the plans have to be tested together? I can't seem to find the answer anywhere and reading the IRS regs is like looking for the proverbial needle in the haystack.

  • I bet that even if you could make two plans, that they would have to aggregate the two plans to conduct discrim testing since they're both under one group. Try this site:
    to find a more definitive answer. Also, you could simply contact your plan administrator for guidance.
  • I'm no expert, but I think AJ is right that the 2 plans would need to be aggregated for testing purposes. If amending the plan is on the table, might there be a safe harbor provision that you could add?
  • I seem to also remember this being the case; the two plans having to be aggregated for testing. However, we too did not pass the HCE test last year. However, we were very close and simply had to return enough funds to the HCE's to get the amounts at a level that would pass. I remember our TPA mentioning the possiblity of a "Safe Harbor" plan that would ensure we never had to worry about this again. However, this involved all participants being 100% vested from day one, rather than our current five year vesting plan. We decided aginst the Safe Harbor, and now our TPA computes the maximu amount our HCE's can contribute thus ensuring that we will pass the next test.
    Good luck,
  • I thought that was going to be the answer, but wanted to test the waters with you guys first. Thanks for all the help.

    We've thought about safe harbor but the cost would be astronomical. We did compute the max our HCEs could contribute and it's right at 3%. Our non-HCE's contributed a whopping average of .7% last year (and yes, that decimal is in the right place). So our HCE's got back most of their contributions. It wasn't a happy day around here.

    Our 401(k) provider is doing some preliminary non-discrim tests for us this year (they didn't do them last year, and I took over this role in mid-Nov so it wasn't high on the radar screen at the time). But our HCEs are not happy about only being able to contribute a couple of thousand.

    Oh well, back to the drawing board.
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