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Component Plan / Restructuring


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When running component plan testing, we're supposed to make sure the separate plans would pass coverage testing as though they were separate plans.  The divvying up of participants would generally not satisfy the nondiscriminatory classification test.  

1.401(a)(4)-9 (c)(4)  indicates that the average benefits percentage test is deemed to pass for each component plan if the test is passed for the plan as a whole.  However, this "deemed passing" does not cover the nondiscriminatory classification test.  As a result (so the story goes) the Average Benefits Test is not available to pass coverage for the component plans and therefore they need to pass the 70% ratio percentage.

I'm curious to see if others have found differing interpretations.  In reading through the ERISA Outline book for example, you would have thought there would be a big disclaimer "Average Benefits Not Available for Coverage!!" but nothing...

So for example, Component Plan Testing is being run for nondiscrimination, so perhaps one could argue that the reasonable business classification test doesn't apply (perhaps the IRS came to the same conclusion when they didn't mention this in aforementioned "deemed to pass" reg).  I note that my "normal coverage testing" of course is passing no problem.  That's the kind of interpretation I am curious to know is out there. 

Now as many of you have likely discovered, because of the patterns of including/execluding HCE's and NHCE's to pass things, getting the ratio percentage above 70% is not particularly challenging, but I do question whether it is even necessary. 

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From the Coverage and Nondiscrimination Answer Book, a great resource that I highly recommend. Where we find restructuring most useful is when you cannot pass average benefits because you have a young HCE with significant deferrals, even when limiting their employer contributions, and so we have our restructured plans pass the RPT for coverage. BUT, if you use average benefits you do not need to satisfy nondiscriminatory classification.

How is a component plan tested for coverage?

Each component plan must pass coverage testing in its own right; that is, component plans may not be aggregated with other plans or component plans in order to pass the coverage tests. Further, if a component plan uses the average benefits test to satisfy the coverage testing requirement, it must be part of a larger plan that passes the average benefits percentage test as a whole.

Each component plan need not pass coverage testing using the same coverage test as the plan as a whole. Further, different component plans may pass coverage testing using different coverage tests. It is not necessary for each component plan to satisfy the nondiscriminatory classification test.

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I've seen multiple reputable sources say that you really do have to hit the 70% ratio percentage if you're cherry picking who is in what plan.  CuseFan, any additional insight provided? Is that the end of the question?  It's just not very detailed and the case in favor of having to pass the 70% threshold seems pretty compelling...

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I find the question a bit confusing so I'll start with your last comment Austin.    If you cherry pick the people in each component plan, the classifications are not reasonable, so each component plan must pass the ratio percentage test.    Yes that is definitely true.   Once you pass that hurdle, you test as if you have two separate plans, and if each rate group in each component does not pass 70% ratio percentage, you must proceed to the average benefits test just like you were testing any two separate plans that fail ratio/percentage but pass the NCT.   Does his help?

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yeah it does!  I actually found a thread with you and Mike Preston from like 10 years ago where you said it just as eloquently...  I am puzzled as all get out as to why the Nondiscrimination Answer Book would have said that though.  Where is Tom Poje, I never see him anymore, LOL...

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