austin3515 Posted March 14, 2016 Share Posted March 14, 2016 I have a plan where the following groupings are used in a "everyone in their group" plan: Department Heads (probably ok!). People w/ More than 5 Years of Service People who terminated AFTER the end of the plan year People who work less than 30 hours per week. For those of you who read this and say "hey, is this the same plan he was posting about a couple of weeks ago?" the answer is yes, but my specific question here is, can I use the Average Benefits test. I should point out that I have it from a very very trusted ERISA expert that allocating a zero % contribution to people with less than 5 years of service does NOT violate 410(a) as long as the plan otherwise satisfies coverage and nondiscrimination. So, can I use the average benefits test with these groupings dictating whether or not people actually get contributions. It seems to me that a reasonable business classification can either be interpreted very broadly (hey, of course it's business!) or very narrowly (e.g., business lines, geographic locations, position)... Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
Mike Preston Posted March 14, 2016 Share Posted March 14, 2016 Can't answer a question when there is a premise I disagree with. You have a 410(a) violation if the under 5 YOS folks don't get anything. Are you sure you explained that to the ERISA expert? Are you asking with respect to the not-yet-effective proposes regs? Wouldn't the answer to that be: "who the $^#% knows?"? Link to comment Share on other sites More sharing options...
Bill Presson Posted March 14, 2016 Share Posted March 14, 2016 What do you do if someone is in more than one group? William C. Presson, ERPA, QPA, QKA bill.presson@gmail.com C 205.994.4070 Link to comment Share on other sites More sharing options...
PensionPro Posted March 14, 2016 Share Posted March 14, 2016 Reasonable classification is a facts and circumstances analysis so hard to tell without looking at the facts and circumstances. Keep in mind however that the regs say, among other things, that reducing the employer's cost of providing retirement benefits is not a relevant business reason. If you are classifying employees w/ < 5 YOS in a separate category to reduce the cost you may not have a strong case. PensionPro, CPC, TGPC Link to comment Share on other sites More sharing options...
austin3515 Posted March 14, 2016 Author Share Posted March 14, 2016 Don't be silly, its to reward long-term employees! Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
BG5150 Posted March 15, 2016 Share Posted March 15, 2016 I'm not sure about the middle one. You allocate for the plan year given, and should be able to do it, ostensibly, on 12/31 (assuming calendar year plan). At that time, how do you know who will leave after that? QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
austin3515 Posted March 15, 2016 Author Share Posted March 15, 2016 (b) Reasonable classification established by the employer. A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification. Here is what the regs say. One thing I notice in the examples is that the classifications do not seem to be determined at an individual level, they are at a business level. It seems to me that something like an individual's status or an individuals years of service departs from the business level classifications like hourly/salary, department type. Maybe someone can articulate it better than me what I'm saying... Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
austin3515 Posted March 15, 2016 Author Share Posted March 15, 2016 Are you sure you explained that to the ERISA expert? I did, certainly. I was totally floored by their response. One thing they pointed to was the match section of their document that allows different matches based on years of service, and there was no stipulation that each level "must" have a match. And if I told you the vendor I think you would agree that they have a lot of sway. Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
Mike Preston Posted March 15, 2016 Share Posted March 15, 2016 I would still run. Maybe before running I'd send the ERISA expert an excerpt from the 410(a) regs that make it clear as a bell that just because you satisfy 410(b) it doesn't mean you satisfy 410(a). Link to comment Share on other sites More sharing options...
austin3515 Posted March 15, 2016 Author Share Posted March 15, 2016 I agree with you 100%. But he was VERY adamant... I even pointed to the example in the regs where only employees if Division B are elgible for the plan, and to be in division B you have to be employed for 5 years, but he was not swayed. Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
Mike Preston Posted March 15, 2016 Share Posted March 15, 2016 I still say run. John Feldt ERPA CPC QPA 1 Link to comment Share on other sites More sharing options...
austin3515 Posted March 16, 2016 Author Share Posted March 16, 2016 FWIW, our recommendation is going to be to add a 3% SHNEC since they also have testing issues. Then we all go home happy... Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
BG5150 Posted March 16, 2016 Share Posted March 16, 2016 But what about the middle classification? Those who terminate AFTER the plan year. Can you do that? QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
austin3515 Posted March 16, 2016 Author Share Posted March 16, 2016 EWveryone is in there own group. You can do ANYTHING. That's the point and that's where this 410a thing gets more complicated (though I reiterate my agreement with Mike Preston). Of course you need to pass coverage and that's when the reasonable classification thing comes in to play. Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
BG5150 Posted March 16, 2016 Share Posted March 16, 2016 Sorry. Missed the everyone in own group thing QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
BG5150 Posted March 16, 2016 Share Posted March 16, 2016 FWIW, then, I don't believe those who terminate after PYE is a valid business classification for the PY in question. The PS gets allocated as/of PYE, so, it's imposing a future condition on a current allocation. QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
BG5150 Posted March 16, 2016 Share Posted March 16, 2016 On that note, do the work per the ERISA counsel. Keep their written opinion on the matter, and in your correspondence to the client, add something to your cover piece such as: We have allocated your 2015 PRofit Sharing according to the plan document and according to the opinions (guidance, recommendations, etc) of ________ (name of ERISA person). John Feldt ERPA CPC QPA 1 QKA, QPA, CPC, ERPATwo wrongs don't make a right, but three rights make a left. Link to comment Share on other sites More sharing options...
austin3515 Posted March 16, 2016 Author Share Posted March 16, 2016 Thoughts on my theory that it needs to be a classification determined based on business principles? So here is an example I thought of. You have two employees who are both nurses. The two nurses both work for the same Doctor. They are both salaried and have the same experience. They are both hourly employees. They are indistinguishable except by name and hair color . The only difference is that one was hired 10 years ago and one was hired 2 years ago. (assume 410a is not an issue even though as discussed I do personally think it is, but I have a leading industry expert telling me it is not). Assume further that the employer wants to exclude people with less than 5 years of service from the contribution. That distinction is not made based on business level criteria. It is based on an individuals particular circumstance. Therefore, length of service is not a business classification, inasmuch as the examples in the regs would suggest. If on the other hand, RN' were entitled to a greater contribution than CNA's, that would be legit because job description is specifically listed as a reasonable classification in the regs. Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
Kevin C Posted March 16, 2016 Share Posted March 16, 2016 First of all, I agree with Mike that you have a 410(a) problem. I'm also thinking that with the amount of the allocation being determined by whether or not service is performed beyond a certain date in the following plan year, those contributions are probably annual additions for the following plan year under 1.415©-1(b)(6)(i)(A). It's not as clear as your earlier question in another thread about requiring employment on a date after the end of the plan year to receive an allocation, but I think it's similar enough that it probably applies. Link to comment Share on other sites More sharing options...
Mike Preston Posted March 16, 2016 Share Posted March 16, 2016 When it is as clear as this is (a violation of 410(a)), I don't think an "ERISA counsel CYA" will protect your firm very well. What you need is an opinion of your own, unconflicted counsel that reliance on said ERISA expert's opinion is reasonable. John Feldt ERPA CPC QPA 1 Link to comment Share on other sites More sharing options...
austin3515 Posted March 16, 2016 Author Share Posted March 16, 2016 Wow, that one goes back a while Kevin! Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
Mike Preston Posted March 16, 2016 Share Posted March 16, 2016 There is a long established principle, reiterated over many years, by many IRS representatives that coverage can not use the ABT if the plan is drafted in a way that is the equivalent of naming specific participants. Do we all agree on that? There is a specific reg provision that states exactly this. The IRS has further said that this provision extends to your plan if the effect of your plan's provisions is that one or more participants get nothing. That is, you are stuck using 70% because, by definition, your COVERAGE is not a reasonable classification. Give them each a penny (I wouldn't go that low, but it does satisfy the rules technically) and you are ok (and then make sure they satisfy gateway, if needed). And, of course, the plan can't be top-heavy, either, or you are looking at a top-heavy entitlement of something other than zero. Link to comment Share on other sites More sharing options...
austin3515 Posted March 16, 2016 Author Share Posted March 16, 2016 The IRS has further said that this provision extends to your plan if the effect of your plan's provisions is that one or more participants get nothing. That is, you are stuck using 70% because, by definition, your COVERAGE is not a reasonable classification. This would be hugely helpful if you have this in writing? Was it a Q&A or something? Austin Powers, CPA, QPA, ERPA Link to comment Share on other sites More sharing options...
Mike Preston Posted March 16, 2016 Share Posted March 16, 2016 It is something I have relied upon for years and years and years. Anybody who has followed the technical details of coverage and non-discrimination testing should be familiar with this issue. I'm sure there are a gazillion posts on this issue (some by me) buried in this forum. Maybe somebody else (Tom?) has easy access to a citation other than the reg itself. But for me, the reg itself is quite clear on this issue. Anything that has the effect of naming somebody out of the plan triggers the inability to use the ABT. Link to comment Share on other sites More sharing options...
DMcGovern Posted March 16, 2016 Share Posted March 16, 2016 http://www.napa-net.org/news/technical-competence/regulatory-agencies/help-stop-a-small-plan-killing-regulation/ Good article from heavy-hitters in the ERISA world, and an opportunity to submit your thoughts on the proposed regulation Link to comment Share on other sites More sharing options...
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