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Uniform points plan fails nondiscrimination testing


Belgarath

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I've only seen two uniform points plans in my life. We've just been given a situation where such a plan failed nondiscrimination testing, cause the formula (which has apparently always worked well in the past) heavily weights contributions based on years of service. One of the owners retired unexpectedly one month into the year, and the plan waives the normal 1000/last day requirement for retirement on or after NRA. Since his comp was so low, (only one month comp) former owner gets something like 60+ % of pay, so the average for the HCE's is too high to pass testing. Although I don't have hard data, it appears that restructuring won't work, or at least not at a contribution level that is possible/palatable. (Query - does the prohibition against uniform points n one of the restructured plans apply if the plan is uniform points to start with, or does it apply only if you are attempting to restructure to a uniform points plan where it isn't ALREADY a uniform points plan?)

Ok, so you go to rate group testing, which also fails. An 11(g) amendment could be done, but here's my question: when you do such an amendment for this type of plan, I assume that any corrective amount/increase to the necessary number of NHCE's must still be allocated (or calculated) on the uniform points allocation formula in the plan? Or to ask it another way, can you simply assign random amounts to random participants like you can in an "everyone in their own group" profit sharing plan, or must you somehow amend the plan to increase the formula for a select group of NHCE's, so that they get (x) points for each unit of compensation, rather than "y" units that they get under the current formula? I suppose it ultimately has the same effect, as the formula would be adjusted for those selected individuals to achieve a passing percentage, so it is ultimately the same thing.

Ugh - if now going to the rate group test, is it going to have to pass gateway? Or is the fact that the basic formula is a uniform points allocation which isn't subject to gateway a saving provision?

Or, is there a better way to do all this?

I know the 11(g) amendments are pretty flexible, but I've never run into this particular situation.

Thanks!

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Does testing on average compensation help?

Does the document contain a fail-safe or any other language that would apply?

If you have to fall back to the general test, you only need to satisfy the gateway if you cross-test. If you are able to pass by, for example, imputing permitted disparity on allocation rates, then the gateway is not needed.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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You can use any 414(s) definition of compensation for testing, it does not have to be the same definition used for allocations.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Yes, but I don't understand what you are getting at. Are you saying that this DC plan may use average annual compensation for nondiscrimination testing, (i.e. use 2017 W-2 compensation for contribution amounts, but for testing those contribution amounts, use a 3-year average of W-2 compensation for 2015-2017)?

I've always understood that yes, you can use different 414(s) definitions for contribution amounts and nondiscrimination testing, but they would be different definitions for compensation for that plan year, where the plan is using current year compensation for accruals.

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Yes, unless your plan document says otherwise, you can use average annual compensation to test amounts that were allocated based on current compensation.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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I don't think you would need to use the points-based allocation formula for your 11(g) amendment. I don't see anything in 1.401(a)(4)-11(g) that would require that.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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