Rate groups and allocations

[FJR]

For most, this will be a basic question, but appreciate any comments. As we dabble more and more into cross-testing, we have the following take over case. Non top heavy cross-tested plan with 5 rate groups. Group 1, 2, 3, and 4 represents the 4 different partners. Group 5 represents all others. By the way the 4 partner groups define them with their actual names (thought that was a no no.). What the prior TPA did was to allocate a different % to each rate group. Example - 29k to #1, 18k to #2, 12k to #3 & #4 and 4% to all the rest. Assuming this passes, I thought the IRS does not allow this as it would be deamed as having 401(k) features. This plan is a 401(k) and all partners max out their deferral.

Any comments would be helpful...

[Tom Poje]

the terminology you used is probably incorrect, but lets see if I can translate.

The plan is a 'class' plan, that is, the allocation is based on different classes, each receiving its own comp to comp allocation. the classes are further defined by name, which some argue might be a possible CODA, but the IRS has issued determination letters on such plans, and in other informal comments from them, this was not a problem.

The only precaution would be if the plan failed the ratio % test of 410(b) it could not rely on the avg ben test to pass 410(b) - thus, if plan excluded terminees or had an hours requirement you might have a problem.

By the way, on class plans, you are suppose to provide a notice directing allocation of some sort.

e.g. total contribution = 100,000

class 1 = 30,000

class 2 = 40,000

class 3 = 30,000

the term 'rate group' normally applies to each HCE in the plan. Thus, it soulds like you have only 4 rate groups (unless you have a member(s) of the 'everyone else class' that is an HCE as well.

[KJohnson]

As to the 401(k) (CODA) issue see the followng discussion:

http://www.benefitslink.com/boards/index.p...ST&f=23&t=19772

[AndyH]

Tom, I don't agree about the ratio percentage test needing to pass. I think this is a potential issue only if one of the people in their own class get a 0 contribution, in which case it could be arguably be the same as having an unreasonable eligibility provision, making the average benefits percentage test unavailable.

[FJR]

Tom, this is a volume submitter document from corbel. Yes there are 5 groups or classes being allocated comp to comp and Yes there are 4 rate groups as there are no other HCE's. So, do I need to pass the ratio % test?

My 410(b) coverage fails and my 410(B) average benefits passes. I have a total of 17 in my coverage, 13 are NHCE and 8 are benefiting. The ebars for the HCE's are 2.654%,4.787%,5.968% and 3.807%. The plan is not top-heavy and the 5 participants that are not getting an allocation are all terminated.

I was able to pass the gateway and cross-testing with an allocation of 12%,9%,6.4%,6.4% and 4% to the rest.

Can someone also comment on when you can use EBAR banding and when you cannot or shouldn't

[Tom Poje]

to pass average benefits test you have to pass 2 tests.

average benefits % test, which I believe you indicated passed.

but you also have to pass nondiscrimination classification test.

this has two parts, the nondiscrimination classification

and 'reasonable classification'

under 1.410(b)-4(b)

says "An enumeration ...by name...is not considered a reasonable classification"

so, the question becomes, is this meant to apply only to eligibility for a contribution (e.g. excluding employees by name) and not to the situation you have, where individuals are in classes by name?

The regs were written before the IRS came out and said you can put people into classes for allocation purposes a few years ago, so does it apply to this situation?

Well, ok, lets suppose we go back a few years ago. instead of a class plan, the company could have set up 5 plans. 1 each for each partner, and one for everyone else. I guess in my present mental state you would fail reasonable classification, but that is only my opinion. I guess I express a concern about simply using the avg benefits test under the circumstances, but I could be way off base on the issue.

..................

generally we use the Corbel documents. In the past, the document failsafe language would say something like

if you failed 410(b)(1) you add back 'x' designated individuals.

The new checklist has this as optional language, but now it says if plan fails 410(b)(1)(B) you add back people.

this may seem like a little change, but it is actually pretty major, because the average benefits percentage test is no longer included. in other words, if this language is in the document you never get to using the average benefits test. or put another way, even if your plan could pass coverage using te average benefits test, you are stuck because you have fail safe language. I don't see how you can read the document other than that.

I am not sure why the change in language. Maybe the IRS required it if fail safe language was to be used.

..........

as for rate banding, I would only use with caution.

1.401(a)(4)-3(d)(3) states "Accrual rates within a given range may NOT BE GROUPED under this paragraph if the accrual rates of HCEs within the range are SIGNIFICANTLY higher than the accrual rates of the NHCEs in the range. (emphasis mine)

I have commented on this issue previously. I would never set the HCE at the 'hi' end and have NHCEs at the 'Lo' end and bring them to a common midpoint. that certainly seems to fail.(Despite what the software I use does - that is why I don't simply punch buttons)

I am willing to bring 1 NHCE down and 1 NHCE up to a midpoint - that would seem to get around the 'significantly' issue. If you ever got audited, well, it is like everything else, if you get someone who really knows the regs it may become an issue.

[FJR]

Thanks Tom that was a good explaination. The document does seem to have that fail safe language, so to be on the safe side we should bring in enough people to pass 410(b)(1)(B). I think the result of doing this will help for cross-testing and will allow us to bump up the partners allocations. There was another person who was re-hired and according to the doc. he becomes immediately eligible for the plan but based on the hire date he is under 500 hrs. of service, so we didn't give him a contribution and kept him out of the testing. I hope that was OK.

I still wonder about each of the 5 groups getting a different rate % of the allocation is in some way a CODA issue as kjohnson is suggeting.

Thanks for all your help. By the way, I assume you have plans written this way. If so, what type of notice do you provide regarding the allocation.

[Tom Poje]

Good job! At least you looked at the document! As I said, I think the old document language was

410(b)(1)

and the new ones are more specific 410(b)(1)(B)

(it is 410(b)(1)© - this is the section that says you can use avg ben % test)

I should have added in my previous comment that the 'reasonable classification test' only applies to 410(b), not to cross testing rules under 401(a)(4). you get a free ride on reasonable classification.

I suppose it it up to the IRS to prove that when an individual is in a class by himself it is a CODA.

For example, if you were in a class, and the boss said do you want $10,000 in cash or as a contribution, then it appears your decision is indeed a CODA. On the other hand, how do you prove that you made that decision and that the boss simply didn't say that FJR worked really hard this year. we are going to give a $10000 bonus in his paycheck, or FJR worked really hard this year we are going to put an extra $10000 into the plan for this person. You can't prove that one way or the other. I guess that is one reason for proving the resolution to be kept in the records somewhere.

(I give up, I tried to modify it so the coulmns line up, but...)

We provide a statement like the following:

Company Name

Plan Year

BE IT RESOLVED, for the Plan Year ended ;, the Corporation shall make a profit sharing contribution of ;, which shall be allocated as follows:

Class Amount

A $

B $

C $

D $

BE IT FURTHER RESOLVED , that the officers of the Corporation and the Trustees are authorized to take any action necessary to implement this Resolution.

Certificate

I, __________________, the duly elected, qualified and acting Secretary of , hereby certify that the foregoing is a true copy of the Resolution adopted by the Board of Directors on the ____ day of _____________,

_______________________________

Secretary

[Guest merlin]

Further to Tom's answer re Corbel's failsafe language, their orginal GUST vs plans contained failsafe language that referenced 410(b)(1), which includes both the ratio % and avg. ben. tests. These vs plans were approved erroneously by IRS. The error was discovered and, after negotiating with the Service to retain the initial approval, corrected in 3/03 withh the revised checklists Tom referred to. The new lists also contain an option to delete the f/s language entirely. FWIW, our standard office procedure is to delete it, so as to have maximum flexibility in correcting coverage failures.

As for classification by name, as Tom points out, it's problematic for coverage if you need to pass the avg ben test. If you pass the r%t you're OK. Of course, you can never be certain which test you'll need to pass, so it's probably better to avoid names for coverage. As Tom has said to me on more than one occasion, "Better safe, than sorry".

Classifying by name for allocaton purposes is a different story. The avg ben test is modified for rate group testing so that the "reasonable classification" test is met numerically. As long as the coverage ratio of a rate group is equal to or greater than the midpoint of the safe harbor/unsafe harbor corridor (or the plan ratio % if less), the classification is reasonable. This interpretation has been agreed to many times elsewhere on these boards, and, more importantly, by the ITS at the LA Benefits Conference in 1998.

Rate banding can be touchy also. If you use Relius software, be doubly careful. Their methodology has the effect of lowering the allocation/accrual rates for each HCE by almost 10% (.95/1.05 = .9048). By their own admission it's very aggressive.

[AndyH]

Sorry guys, Merlin this time, but I must again dissent on Merlin's second paragraph. I think that the allocation groups are completely irrelevant for purposes of testing the plan as a whole for 410(b). What matters is the eligibility criteria for the plan or aggregated plan.

Where's Blinky?. We see eye to eye on this matter, and that's awful tough because he has 3 eyes!

[Tom Poje]

Thanks for the info. I wondered why there was a change to the language. We also have chosen not to include the language.

It's an interesting trade off. If you include the language, then later fail coverage you simply add people back in to pass. On the other hand, you might have passed using the average benefits test, so you have given something to someone you might not have to.

If you don't include the language, and later fail, then you have to put in a corrective amendment to resolve the problem. And, it has to be a meaningful benefit!

In other words, the fail safe says something like give the terminee with most hours a contribution. It doesn't appear to matter if he is vested or not.

Under the corrective amendment you have to provide at least some vesting as well to make it meaningful.

...................

I would agree that if using Relius use rate band sparingly, though with the latest version you can set the range for at least one band. I haven't figured out how to set more than one band at a time, I think there may be a glitch in the system. Hopefully you will only have to set one.

[Guest merlin]

Andy,

I think we agree, I just didn't say it as clearly as I might have. I was trying to point out the difference between having class exclusions for eligibility, as opposed to classes for allocation. If your eligibilty class exclusions are based on the usual job title, pay basis,location, etc. you can pass coverage by either the rpt or the abt. But if your class exclusion are by name that's an unreasonable classification and you lose the abt, but if you pass the rpt you're OK.

Once you get past coverage (whatever the eligibility and whatever test you pass) and you have allocation groups by name, as long as each rate group is at least at the midpoint of the corridor, you're OK, because that's the definition of a reasonable classification for a4 purposes.

Agree? Disagree? Blinky's in Phoenix. He's not up yet.

[AndyH]

Magically well stated Merlin. Thanks for the clarification.

[FJR]

The fail safe according to this plan shall be those who have not separated from service prior the the last day and have completed the greatest number of hours of service. Again, by bringing in a few people to pass coverage, it has helped the allocations to the partners and we were able to bring 3 of the partners up a few % points. Seems like a small trade off.

I have to admit that I am a little fuzzy when you talk about class exclusion for eligibility vs. allocation. As I started this thread, this plan breaks up the allocation into Groups when it talks about the non-elective contribution. Furthermore it names group A,B,C and D specifically by the name of the partner. The fifth group is all others and there are no HCE's in this group.

I'm still stuck on this?

Partner 1 gets 12%

Partner 2 gets 10.3%

Partner 3 gets 6.8%

Partner 4 gets 6.5%

All others get 4%

9 out of 12 NHCE's benefit - orignally 7 out of 12 so it failed. Bring 2 people in who had less <1000 but were employed on last day. (Non-top heavy)

My gateway passes

My cross test passes(non-discrimination class test)

However my ratio % test fails for each rate group ( 4 in all) My mid-point is 33.75%

Do I move on?

[Tom Poje]

ok, one more stab.

Based on your comments, document contained fail safe language.

plan failed ratio % test of 410(b), and because of document language you can't use avg ben test to pass coverage.

therefore you added a few NHCEs. an advantage of fail safe is that you simply add them, no amendment needed.

lets see, you had 12 NHCE and 4 hce, so nhce concentration % = 75% which translates to mid point of 33.75%. (actually I think the original post had 1 more NHCE, but what the heck)

you said plan passes cross testing(nondiscrim classification test) that statement is a little incomplete as the classification test is one part needed to pass. This implies each HCE has a ratio % > 33.75% (or put another way, you ran 4 ratio %, it is possible they were all the same %, but unlikely)

so as long as plan passes avg ben % test you pass cross testing.

[Guest merlin]

Tom,

In reading your ealier post it sounds like the presence of failsafe language in the plan prevents you from using the avg ben test to pass coverage in the first place. I thought that the failsafe language only kicked in if you failed coverage, including the use of the abt. If you fail both the rpt and the abt, then you go to the failsafe langaue to correct the failure, and the failsafe correction methodology precludes the abt (unless you have an early edition of the Corbel vs plan and a favorable determination letter). Am I off base?

[KJohnson]

Merlin--with my volume submitter the IRS reviewer was fairly adamant that if you wanted a fail-safe addback for coverage you were stuck with the ratio percentage test. They had "definitely determinable"/employer discretion" problems with the alternative of letting you go with ABT or use the add-back. They required the document to specify that an add-back would be automatic once you failed ratio-percentage as well as specify the method of identifying the employee who were to be "added back?

I guess I don't really see this issue if you put in your document that 1) ratio percentage 2) if you fail ABT 3) If you still fail add-back. This should elminate any discretion or definitely determinable problems.

[Guest merlin]

Right. The cure of a 410b failure by failsafe language must be restricted to the rpt. The Corbel plan was approved in error,that's why they had to change it. Tom's earlier post seems to say that failsafe language cuts you off from the abt for all purposes.Is that right? The plan docs I've seen refer to failing 410b. If you test coverage and fail the rpt, you still can try the abt. If you pass the abt you pass 410b, and the failsafe language never comes into play. If you fail the rpt and the abt, then you've failed 410b and then you're stuck with expanding the benefiting group to pass only the rpt. Or has my chronic Mad Cow Disease returned?

[Tom Poje]

of course, now that we have removed the fail safe language it is hard for me to say exactly how the Corbel documents have it worded.

After printing one out and reading it, we said, we don't want that in there. if I recall the fail safe was something like

If plan fails ratio percenatge you add back.

(Not if you fail ratio, but pass avg ben % then you don't have to add back)

so it doesn't matter if your avg ben passes, you have to follow the terms of the document. you failed ratio, you have no choice but to add back. This would agree with KJohnson's comments from the IRS reviewer.

or at least that is how I would read it.

[Blinky the 3-eyed Fish]

There was another person who was re-hired and according to the doc. he becomes immediately eligible for the plan but based on the hire date he is under 500 hrs. of service, so we didn't give him a contribution and kept him out of the testing. I hope that was OK.

I am not sure what was meant by "kept him out of the testing", but just for clarification, he should be in the denominator as a 0, since he is not excludable (before considering any add-backs, of course).

Merlin, how do you know I am in Phoenix?

[AndyH]

I can understand KJohnson's IRS reviewer's comments about the need to limit coverage testing to the ratio percentage test if the plan has a failsafe.

The average benefits percentage test is not unlike the general test in that there are infinite "additional testing options", interest rates, etc. so the question becomes when do you quit and say you failed.

Per Larry Deutch, Ed Burrows says the general test never fails; the client just runs out of money.

[Guest merlin]

Blinky,

I was polishing my crystal ball, and...

Just kidding. Actually,there was a thread a while ago, maybe a year or so, started by someone who had gotten a db plan proposal and for some reason was questioning the actuary's #s. He identified himself (or the actuary) as being from Phoenix. In one of your responses you indicated that you were from Phoenix too, and that you knew the guy in question.

[Blinky the 3-eyed Fish]

Good memory.

[Earl]

Example - 29k to #1, 18k to #2, 12k to #3 & #4 and 4% to all the rest.

29k/200k = 14.5/3 = 4.833

Isn't there also a gateway problem here?

[AndyH]

looks that way.