A plan sponsor has an ESOP plan which is failing the ratio percentage test for 410(B) minimum coverage. The plan sponsor also has a 401(k) plan.

When doing the average benefit percentage test:

1.Do the 2 plans have to be aggregated? (I have read in some places that ESOPs and union plans do not need to be aggregated, but other sources seem to indicate that ESOPs do need to be aggregated - has this been changed?)

2. What employees can be excluded? (Do all employees that have met the eligibility requirements for either plan have to be included, or is it possible to have some type of statutory exclusion of employees, like excluding employees under age 21 or less than a year of service?)

[Edited by John A on 07-13-2000 at 09:41 AM]

ESOPs cannot be aggregated with other plans. Treas. Reg. Section 1.410(B)-7©(2).

Not sure I agree with Kirk.

1. The general rule is that ESOPs cannot be aggregated and must be tested separately.

2. But for purposes of the ABT, ESOPs *must* be taken into account. See Reg. 1.410(B)-7(e)(1)(iii).

3. The uncertain issue involving ESOPs and the ABT is whether you have to test the ESOP allocations on a contribution or benefit basis. The final regulations arguably leave some leeway to test on a benefits basis even though for ESOPs can't be cross-tested under the general 401(a)(4) rules.

I think that Harry O is right that the special disaggregation rule for ESOPs does not apply for purposes of the ABT.

and be careful! aggregating the ESOP only refers to the ABT test.
and if you chose to impute permitted disparity, remember, you can not impute on the ESOP

Tom Poje:

1. Is that because ESOPs cannot use permitted disparity?

2. Could you provide us with a citation on that point?

you are correct. since ESOPs can't have permitted disparity, you can't impute. same logic as not imputing on deferrals and matches. you don't impute on that portion of the plan either.
as far as reg cites go...I think this is what you want
1.401(a)(4)-2©(2)(iv)
'disparity permitted under 401(l) may be imputed in accordance with the rules of 1.401 (a)(4)-(7)'
which in turn say you can't integrate an ESOP.

as a further note, technically you could have an integrated age weighted plan. its real ugly calculation, but I have seen a write up on it. Therefore you could even impute an age weighted plan if you actually failed the test somehow.

I think that when you go to the ABT, you can impute permitted disparity on the entire aggregated value, since all previous rules are off. I've had this discussion re imputation for a 401(k) component, and my actuarial firm convinced me that it was correct to do so.