[This was originally posted under Cross Tested Plans-received no response]

It seems clear that an ESOP cannot be cross tested for 401(a)(4) purposes, but if you are testing a profit sharing plan and must go to the average benefits test, and an ESOP is included, does anything prohibit determining the employee benefit percentages for the combined allocations on a benefits basis?

I don't see anything prohibiting it, but it seems like a contradiction.

IRS officials adamantly say that one can't test ESOP contributions on a benefits basis for average benefit percentage testing. Question 27 from the 1997 Enrolled Actuaries meeting gray book plus conversations with the IRS is my source for this.

Nonetheless, I believe a reasonable interpretation of the regulations is that it is permitted, although I'd advise the client that this is an aggressive position and to confer with legal counsel.

MWeddell, thank you very much. I could find absolutely nothing addressing this question. Your cite is it.

We're going to take a counter interpretation on the basis that we are not testing the ESOP itself, but the IRS position on the issue is very helpful.

I still can't figure out why the prohibition on cross testing ESOPs exists if you can cross test a K deferrals for ABPT.

I agree with MWeddell. If you pick your way slowly through the regulations you'll come to the conclusion that you can do ABT testing on a benefits basis even if an ESOP is part of the testing group. ERIC and APPWP submitted comments to the IRS on this issue. You might want to take a look at these because they will give you the citations you need to support this position.

Thank you. Can you point me in the right direction in terms of where to find such comments?

I'm not sure that this is right, but check out Treasury Regulation Section 54.4975-11(e)(1).

If you are including a leveraged ESOP in an average benefits percentage test, do you use ESOP contributions or allocations for the test? [There can be a significant difference.]