Understanding 410(b) Testing for Qualified Retirement Plans

The short answer is: Money. 

The longer answer is, through advanced plan design, often involving two paired qualified plans and selective eligibility in each, you can create a situation where you limit how much the NHCEs’ benefits cost while maximizing the benefits to the HCEs – or even just to certain HCEs. Combo plans like when combining a 401(k) New Comparability plan with a Pension Plan are a perfect example of this practice, and when used by an experienced TPA can selectively target benefits to all parties while passing testing with flying colors.

The stereotypical example of this is a Doctor’s office. The 50-something doctor, and a few select employees, are covered under a pension plan, maximizing the doctor’s benefits while only including a few of the younger, more affordable staff. A second plan, a 401(k) new comparability plan, includes everybody, and is where the employees get most of their benefits from. The plans are tested together to see whether coverage and nondiscrimination testing passes, and while the plans would fail if tested separately, paired together they pass. This allows the doctor to receive large contributions via the pension plan, while only costing much smaller matching contributions in the 401k plan.