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Take a look back at the original questions being asked. How did the become a debate about the gateway?

It became a debate about the gateway, because I believe that the original poster's plan probably satisfies 410(b) and 401(a)(4) without requiring any additional contribution. Just a little extra testing.

And, of course, the proper application of the regulations, which you seem to feel is not the proper thing to do, for various reasons which appear to boil down to: "because you think that is the way it works."

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Mike,

For what it is worth I agree with you on this one. The gateway does not apply in this instance.

Perhaps Tom Poje will chime back in on the topic since he knows so much about Safe Harbor Plans (Speaks and sings on this topic) and Coverage Testing (wrote the book on this topic) when the gateway actually does apply.

Stephen

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I think perhaps it applies because of the fact that we had to include the top heavy minimums to satisfy the average benefits test. Therefore, the safe harbor status is blown, and now 401(a)(4) testing is required. And if the rate group test fails the ratio %age test using allocation rates, then it must be X-Tested. And if any of the rate groups fail the ratio %age test (and pass NDC), then the average benefits test must be passed, most likely using X-Testing. This is how the gateway comes into play.

For what it's worth, I just had a very expensive ERISA Attorney design a plan based on cross-testing the average benefits, with no need for the gateway.

Part II - A Question of my Own

LEt's say you can pass the rate group testing using allocation rates, EXCEPT that you don't pass the ratio percentage test based on allocation rates (but you do pass the NDC). So now you run the average benefits test, but need to use X-Testing. Does that require the gateway? I wonder... Very unlikely scenario, I know, but I think the answer would help clarify things...

Austin Powers, CPA, QPA, ERPA

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I think perhaps it applies because of the fact that we had to include the top heavy minimums to satisfy the average benefits test. Therefore, the safe harbor status is blown

There is an exception in the regulations that effectively maintains the safe-harbor status of a plan that provides TH benefits to those who would otherwise not receive anything. There is a catch, however. The plan must pass 410(b) while considering those who received the TH minimum as "not benefitting". If you read this whole thread, you will see that this point has already been mentioned.

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Part II - A Question of my Own

LEt's say you can pass the rate group testing using allocation rates, EXCEPT that you don't pass the ratio percentage test based on allocation rates (but you do pass the NDC). So now you run the average benefits test, but need to use X-Testing. Does that require the gateway? I wonder... Very unlikely scenario, I know, but I think the answer would help clarify things...

Austin, the question you just posed is the precise, exact, identical issue that this thread has devolved into. It is not an unlikely scenario at all. It happens all the time.

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Mike,

For what it is worth I agree with you on this one. The gateway does not apply in this instance.

Thanks, Stephen.

I don't think that the Nut will be impressed by anything short of an Anvil, however.

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Although I initially agreed with Mike on this, I decided to go back and review the regs and various other literature/research items to make sure my conclusions were right. As I figured, there is absolutely no doubt that ERISANut is wrong on this one. The regs seem to be very clear and I cannot find any written authority that agrees with his assumptions.

If you review the regs and other written literature on the subject you can't help but come to the same conclusion. I doubt you will find anything written that does agree with his assumption.

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some facts, as Mike has tried to point, but without a real example being put forward, it is hard to tell.

Plan formula = 8% plus 5.7% integration (for example I will use 90,000 as TWB)

plan has 1 HCE at 200,000

10 NHCE. 6 received through formula, 4 received top heavy 3%

410b coverage - all benefit, so plan passes coverage.

basic formula is safe harbor so the question is does plan have to test for nondiscrim since some people received different rate?

The regs clearly state if plan can satisfy 410(b) by treating top heavy folks as '0', then plan is still treated as being safeharbor formula and no 401(a)(4) testing needed. (In other words, you are not penalized by providing a top heavy)

so HCE = 22270 contribution (8% of 2000,000 and 5.7% * (200000 - 90000)

6 NHCE at 8%

4 top heavy folks treated as 0.

then ratio test for his is benefiting is 6 / 10 = 60% plan fails ratio, need to test avg ben test.

Nondiscrim classification test

if you impute disparity (and test on an allocation basis) then

HCE E Bar = 13.7 (22270 + 5.7%*90000)/200,000

6 NHCE E Bar = 13.7 (8% + 5.7%) of course! NHCE = HCE Ebars in all plans that use max TWB and integration %.

so you have 6 of 10 NHCEs in the rate group.(60%) this is certainly enough to pass any safeharbor.

thus, if you pass avg ben % and it passes you are ok. cites from the gray book and other sources (which point to the preamble of the regs) have indicated simply running the avg ben % test on an accrual basis is not considered cross testing.

without knowing ages and stuff I am not willing to make a broad statement that the plan 'most likely' passes avg ben %.

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some facts, as Mike has tried to point, but without a real example being put forward, it is hard to tell.

Plan formula = 8% plus 5.7% integration (for example I will use 90,000 as TWB)

plan has 1 HCE at 200,000

10 NHCE. 6 received through formula, 4 received top heavy 3%

410b coverage - all benefit, so plan passes coverage.

basic formula is safe harbor so the question is does plan have to test for nondiscrim since some people received different rate?

The regs clearly state if plan can satisfy 410(b) by treating top heavy folks as '0', then plan is still treated as being safeharbor formula and no 401(a)(4) testing needed. (In other words, you are not penalized by providing a top heavy)

so HCE = 22270 contribution (8% of 2000,000 and 5.7% * (200000 - 90000)

6 NHCE at 8%

4 top heavy folks treated as 0.

then ratio test for his is benefiting is 6 / 10 = 60% plan fails ratio, need to test avg ben test.

Nondiscrim classification test

if you impute disparity (and test on an allocation basis) then

HCE E Bar = 13.7 (22270 + 5.7%*90000)/200,000

6 NHCE E Bar = 13.7 (8% + 5.7%) of course! NHCE = HCE Ebars in all plans that use max TWB and integration %.

so you have 6 of 10 NHCEs in the rate group.(60%) this is certainly enough to pass any safeharbor.

thus, if you pass avg ben % and it passes you are ok. cites from the gray book and other sources (which point to the preamble of the regs) have indicated simply running the avg ben % test on an accrual basis is not considered cross testing.

without knowing ages and stuff I am not willing to make a broad statement that the plan 'most likely' passes avg ben %.

Okay Tom, your example here suggests passing the Average Benefits Test without cross-testing. My comments are clear on that one. But now lets address when cross-testing is used. When you do, please pass the napkins around.

My comments are complete about the differences between Cross-testing and Average Benefits Test. Cross-testing is only one of several methods of passing the average benefits test (or coverage ratio test for that matter). When you cross test, you must satisfy the gateway unless you are exempted by the primarily DB in nature exception or the broadly available exception. All these amatures in the industry are quick to throw mud, but fail to understand one of the most basic principals of New Comparability. I'll leave it to you to put clear them up, because I don't care whether they remain confused on the issue or not.

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I think perhaps it applies because of the fact that we had to include the top heavy minimums to satisfy the average benefits test. Therefore, the safe harbor status is blown, and now 401(a)(4) testing is required. And if the rate group test fails the ratio %age test using allocation rates, then it must be X-Tested. And if any of the rate groups fail the ratio %age test (and pass NDC), then the average benefits test must be passed, most likely using X-Testing. This is how the gateway comes into play.

For what it's worth, I just had a very expensive ERISA Attorney design a plan based on cross-testing the average benefits, with no need for the gateway.

Part II - A Question of my Own

LEt's say you can pass the rate group testing using allocation rates, EXCEPT that you don't pass the ratio percentage test based on allocation rates (but you do pass the NDC). So now you run the average benefits test, but need to use X-Testing. Does that require the gateway? I wonder... Very unlikely scenario, I know, but I think the answer would help clarify things...

Outside of meeting the facts and circumstances for the "broadly available" exception, yes. Let say you have 5 divisions that allocate contributions separately to each division, and one division fails to pass 410(b) as a standalone under the circumstances you provided. This, and other facts (which you may research on your own) make deem the gateway unnecessary since the allocation are broadly available to a large group.

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Mike,

For what it is worth I agree with you on this one. The gateway does not apply in this instance.

Perhaps Tom Poje will chime back in on the topic since he knows so much about Safe Harbor Plans (Speaks and sings on this topic) and Coverage Testing (wrote the book on this topic) when the gateway actually does apply.

Stephen

Hope you like eggs. You had the option of remaining silent and being confused, but you also stepped forward to show you have not understanding of some of the most basic rules of cross-testing. Tom has apparently performed cross-testing. Hopefully, he will fully explain (as I have) the meaning of cross-testing.

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some facts, as Mike has tried to point, but without a real example being put forward, it is hard to tell.

Plan formula = 8% plus 5.7% integration (for example I will use 90,000 as TWB)

plan has 1 HCE at 200,000

10 NHCE. 6 received through formula, 4 received top heavy 3%

410b coverage - all benefit, so plan passes coverage.

basic formula is safe harbor so the question is does plan have to test for nondiscrim since some people received different rate?

The regs clearly state if plan can satisfy 410(b) by treating top heavy folks as '0', then plan is still treated as being safeharbor formula and no 401(a)(4) testing needed. (In other words, you are not penalized by providing a top heavy)

so HCE = 22270 contribution (8% of 2000,000 and 5.7% * (200000 - 90000)

6 NHCE at 8%

4 top heavy folks treated as 0.

then ratio test for his is benefiting is 6 / 10 = 60% plan fails ratio, need to test avg ben test.

Nondiscrim classification test

if you impute disparity (and test on an allocation basis) then

HCE E Bar = 13.7 (22270 + 5.7%*90000)/200,000

6 NHCE E Bar = 13.7 (8% + 5.7%) of course! NHCE = HCE Ebars in all plans that use max TWB and integration %.

so you have 6 of 10 NHCEs in the rate group.(60%) this is certainly enough to pass any safeharbor.

thus, if you pass avg ben % and it passes you are ok. cites from the gray book and other sources (which point to the preamble of the regs) have indicated simply running the avg ben % test on an accrual basis is not considered cross testing.

without knowing ages and stuff I am not willing to make a broad statement that the plan 'most likely' passes avg ben %.

But the initial post already stipulated that he couldn't pass avg ben treating TH's as zero... So doesn't that then bring you into non-safe harbor status?

Austin Powers, CPA, QPA, ERPA

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But the initial post already stipulated that he couldn't pass avg ben treating TH's as zero... So doesn't that then bring you into non-safe harbor status?

1. I don't think the initial post said that.

2. *IF* the initial post said that, it was predicated on using an "allocation rate" testing methodology, not an "EBAR" (cross-testing) testing methodology.

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The plan formula fails 410(b).

I remain supremely unconvinced that the above is a true statement.

There is a difference between "benefiting" under the plan and having the plan formula satisfy the safe-harbor requirements of a uniform allocation formula. For instance, if you have a formula that provides a benefit in excess of the TH minimum, then that formula must be tested under 410(b) while treating the participants who received only the TH minimum as not benefiting under that formula. If not, then you have to perform more testing to prove nondiscrimination.

Tom Poje, your last comment about treating the employees who received the TH minimum only as receiving ZERO, and then testing the other formula; isn't that what I said earlier. (But I must have been totally wrong) Let's go ahead and give these antagonists some real knowledge.... What would exempt you from the use of a gateway when cross-testing?

a) By testing under the average benefits test

b) When the benefits provided are primarily DB in nature

c) When the allocations are broadly available

d) b and c only

e) a, b, and c

My answer is d.

Mike Prestons answer is a.

Tom Poje, what is your answer?

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What would exempt you from the use of a gateway when cross-testing?

a) By testing under the average benefits test

b) When the benefits provided are primarily DB in nature

c) When the allocations are broadly available

d) b and c only

e) a, b, and c

My answer is d.

Mike Prestons answer is a.

Tom Poje, what is your answer?

Keep in mind that we are specifically discussing the use of cross-testing in the average benefits test under 410(b)(5) and therefore how to satisfy 410(b). We are not talking about the use of cross-testing as a means to satisfy the general test under 401(a)(4).

A casual reader of what the NUT has written, as I quoted above, would infer that he is talking about escaping the gateway requirement under 401(a)(4) in some manner.

Nobody is arguing for that.

This is purely a discussion of the use of cross-testing in the average benefits test under 410(b).

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My answer would be "A" also in the circumstances we have been discussing. Since the plan treats those receiving only the top heavy minimum as "not benefitting" the allocation formula is deemed a safe harbor designed formula so I do not have to test under 401(a)(4) non-discrim. I now have to pass coverage and can do so testing on a benefits basis for the average benefits test if that gets me to pass.

The regs under 410(b) do not cross-reference to any of the gateway requirements. The reg under 401(a)(4)-8(b)(1)(i) states "Equivalent benefits under a defined contribution plan (other than an ESOP) are nondiscriminatory in amount for a plan year if--". Let's stop right there. We are not testing to see if equivalent benefits are nondiscriminatory in amount. We are testing to see if we pass coverage.

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My answer would be "A" also in the circumstances we have been discussing. Since the plan treats those receiving only the top heavy minimum as "not benefitting" the allocation formula is deemed a safe harbor designed formula so I do not have to test under 401(a)(4) non-discrim. I now have to pass coverage and can do so testing on a benefits basis for the average benefits test if that gets me to pass.

The regs under 410(b) do not cross-reference to any of the gateway requirements. The reg under 401(a)(4)-8(b)(1)(i) states "Equivalent benefits under a defined contribution plan (other than an ESOP) are nondiscriminatory in amount for a plan year if--". Let's stop right there. We are not testing to see if equivalent benefits are nondiscriminatory in amount. We are testing to see if we pass coverage.

This is the reason I am an expert and you are not. What I've been explaining all along is that under the New Comparability Rules, you must satisfy the gateway in order to use cross-testing. This does say anything about how to test under 410(b). You may cross-test, or you may not.

But, IF, IF, IF (let me emphasize again, IF) you cross-test a DC plan in order to pass 410(b), then this cross-testing would not be validated unless you satisfy the gateway (or the primary DB or broadly available exception).

This isn't that complicated; especially when you've done it hundreds of times.

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My answer would be "A" also in the circumstances we have been discussing.

I think you are about to get an offer of a napkin, or eggs, or something similar, from the Nut.

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This isn't that complicated; especially when you've done it hundreds of times.

To be fair to the Nut, the IRS itself has said that it is possible (if you don't understand the history) to read the regulations themselves and come to the same conclusion that the Nut has come to. That is why the IRS saw fit to clarify this in the preamble to the regulations. And why the item I quoted from a conference specifically pointed this out.

It is interesting to note that the NUT says he has done this hundreds of times. Well, the IRS certainly won't object if you raise benefits to the point required by application of the gateway rules where they don't really apply. The IRS will most assuredly issue favorable letters of determination on the basis that the Nut lays out.

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This isn't that complicated; especially when you've done it hundreds of times.

To be fair to the Nut, the IRS itself has said that it is possible (if you don't understand the history) to read the regulations themselves and come to the same conclusion that the Nut has come to. That is why the IRS saw fit to clarify this in the preamble to the regulations. And why the item I quoted from a conference specifically pointed this out.

It is interesting to note that the NUT says he has done this hundreds of times. Well, the IRS certainly won't object if you raise benefits to the point required by application of the gateway rules where they don't really apply. The IRS will most assuredly issue favorable letters of determination on the basis that the Nut lays out.

Rhetoric, rhetoric, and more rhetoric. You should try more fundamentals of why certain things are as opposed to quoting regs based on circumstances that do not apply. Let's not confuse the issue; as you have been confused from the onset. The question is here for your friend Tom Poje to answer. My answer above was "d" while your answer was "a". The discussion at this point is over as our differences of understanding have been laid out into a simple test question.

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I am sorry to see this topic to take on an air other than 'neutrality' (or at least it seems to me) from numerous parties involved.

That should not be the point of posting. but things happen like that in the heat of the argument. I admit to losing it this Sunday when an indiviudal knocked at the door and (in my opinion) tried to twist and turn things that were in the Bible and kept changing words that weren't there, would try and change things from what I was pointing out, etc - but that is another story.

anyway

my original comment regarding cross-testing was simply meant to imply if you got to the point of cross testing you don't have a choice of picking and choosing who gets - the minimum allocation gateway would go to all ees who received top heavy.

however as pointed out, there is more than one gateway (unfortunately the IRS used the term 'gateway' in more than one place) - broadly available is also a possibility. and broadly available does not require passing the avg ben % test. though now that you pass broadly available you go on to cross testing and fail avg ben % test and at that point you would have to give at least some of the NHCEs an increase. and that could only be done, if I understand things correctly, through a corrective amendment.

This is an interesting plan. Assume plan fails avg ben % test as indicated.

Plan could pass on allocation basis by bringing enough 3% to 8% to pass.

plan could pass on accrual basis by providing 5% to all top heavy (assuming that is sufficient to pass avg ben% as well, or of course possible the ratio % for each HCE.

wonder which would cost more, or which one the employer would want.

and I am sure there are other possibilities.

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Rhetoric, rhetoric, and more rhetoric. You should try more fundamentals of why certain things are as opposed to quoting regs based on circumstances that do not apply. Let's not confuse the issue; as you have been confused from the onset. The question is here for your friend Tom Poje to answer. My answer above was "d" while your answer was "a". The discussion at this point is over as our differences of understanding have been laid out into a simple test question.

Why do you say that I'm quoting regs based on circumstances that do not apply? Isn't it the other way around? YOU want to apply a portion of the regulation (the gateway rules) to the average benefits test under 410(b). You are the one that is quoting regs that do not apply, not me.

I'm trying to say that the reg in question specifically does NOT apply, because there is no reference to it in the regs.

Your loose use of the English language is contributing to your confusion.

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I am sure there are other possibilities.

Perhaps such as the question on the table?

Tom, if you don't want to weigh in on the actual question, that is fine with me.

I know the Nut is wrong and, so far, not a soul has come to his defense (except, ironically, me by reiterating that the IRS itself felt that a clarification was needed in the preamble).

My hypothesis is a simple one: Looking at Q&A 29 of the ASPA Annual Conference in 2002, is the IRS correct when they indicate a "yes" answer to both parts of the question.

Here is a link to that post.

http://benefitslink.com/boards/index.php?s...ndpost&p=132933

You know, I think I didn't initially post the entire Q&A 29. And the second part is quite critical. NUT says he won't read it, anyway, but for others who stumble across this thread, I have added the complete text of Q&A 29 to the post.

Hey, NUT, can you bother to read it and see if you have a different reaction?

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Rhetoric, rhetoric, and more rhetoric. You should try more fundamentals of why certain things are as opposed to quoting regs based on circumstances that do not apply. Let's not confuse the issue; as you have been confused from the onset. The question is here for your friend Tom Poje to answer. My answer above was "d" while your answer was "a". The discussion at this point is over as our differences of understanding have been laid out into a simple test question.

Why do you say that I'm quoting regs based on circumstances that do not apply? Isn't it the other way around? YOU want to apply a portion of the regulation (the gateway rules) to the average benefits test under 410(b). You are the one that is quoting regs that do not apply, not me.

I'm trying to say that the reg in question specifically does NOT apply, because there is no reference to it in the regs.

Your loose use of the English language is contributing to your confusion.

Correction, I never applied to use of the gateway to the average benefits test directly. I simply applied to use of the gateway to cross-testing, regardless of whether the coverage ratio test or the average benefits test is being used. Again, part of being an expert is knowing what train of thought you are on; and not running to the regs to bring in literature where the facts do not line up.

It was you that brought in a reg where the IRS explained the gateway was exempted because the benefits were primarly DB in nature where the average benefits test was being used to test DB and DC together. You used that same reg as your argument that by the mere fact that the average benefits test was being used ( not because a DB plan was involved) negated a need for the gateway into cross-testing. You lack of understanding on such a simple topic in New Comparability has led to a 5 page discussion that will likely prevent those looking to learn from understanding this concept.

Look back at my original post. While I attempt to break the question down into components and address each component to show the thought processes that pension experts apply on a daily basis, you bring in your own set of regs that apply to situations that aren't being address; just be you are confused.

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