Discrimination Testing

[wsp]

Client has an integrated plan with the base contribution approximates 8% of pay. Plan is also Top Heavy and intially failed 410(b) due to large number of retirements during the year. As a means of passing 410(b) I am able to include the top heavy group for average benefits testing under 401(a)(4). Do I then simply start at the 3% top heavy contribution and increase that number until I pass the 401(a)(4) test? Or do I have to start at the oldest employees (in terms of service, not age) and bring them in at the regular contribution rate in order to pass (in other words separate out the top heavy from 401(a)(4))?

ErisaNut...you and I had talked about this before and this was the reason that I was increasing the top heavy to pass 401(a)(4), just had lost my train of thought back then.

[ERISAnut]

Okay, I am beginning to see it but am still a little unclear on all that has transpired.

I'll try to break your question down into the following facts:

1) Plan has a permitted disparity formula of 8% of base compensation plus 5.7% of excess compensation (with base compensation defined as the entire 401(a)(17) and not TWB).

2) This formula, even though provides higher percentages to higher paid, is deemed uniform by 401(l) and is subject to only the coverage ratio test.

3) Plan has a last day and 1000 hours requirement in order to receive an allocation under this formula.

4) There were some participants who were employed on the last day who worked less than 1000 hours that were excluded from this allocation. However, because of the top-heavy requirements received a top heavy minimum allocation of 3%.

5) You performed the general test (i.e. avg. benefits test, cross-testing, or other) by taking into account all contributions to be tested under whatever test was used; and continued to fail.

If this is correct, the one option would be to determine the impact of an additional discretionary based allocation (since the 5.7% maximum excess has been reached) to determine the impact that would have on the test. For instance, how would the general test come out of the discretionary formula was 8.5% of base compensation plus 5.7% of excess compensation.

Another option would be a corrective amendment to bring more participants into the allocation. If this is used, the class of participants brought into the allocation by the corrective amendment must remain throughout the end of 2006 (assuming that this is 2005 being tested). Also, such corrective amendment must by done by 9 1/2 months after year end (October 15th). Since this is an amendment, there is flexibility in determining how it will be done.

This gets difficult without seeing the actual test, but this should provide a general guide; assuming I have the facts straight.

[wsp]

4) There were some participants who were employed on the last day who worked less than 1000 hours that were excluded from this allocation. However, because of the top-heavy requirements received a top heavy minimum allocation of 3%.

You've got it pretty much nailed down.

One part that I realized I left out after reading your summary is that the entrance requirements for the 401k are much more lenient than the profit sharing and thus the number of people brought in for the top heavy minimum is fairly large. Additionally their ages in relation to everyone else makes that 3% more valuable and increasing it makes more of a difference when using accrual factors.

So, it's my hope to piggyback off the ability to simply increase the TH minimum contribution rather than amend plan to bring in people for 2 years when it shouldn't be necessary to go through this next year or even raising the base percentage which actually doesn't help me based upon the company census.

So that's my question...can I influence the 401(a)(4) testing by increasing the TH percentage rather than amending the plan. And, if so, is it capped? Could I theoretically go higher than that 8% base allocation figure?

[Mike Preston]

I am so confused.... I guess that is to be expected at times.

You can not increase "the top-heavy contribution" above 3%. "The top-heavy contribution" is defined in the plan. End of story.

As indicated, without amending the plan, about the only thing you can do is put more money in. More money going in will be allocated in accordance with the allocation rules defined in the plan. End of story.

But I'm having trouble with this whole thing. I am finding it difficult to believe that you are failing 410(b). Have you run the average benefits test? Have you run the average benefits test on a cross-tested basis?

We need numbers here (probably lots of them - at least start with body counts), or there really isn't any way to help.

[Mike Preston]

Another option would be a corrective amendment to bring more participants into the allocation. If this is used, the class of participants brought into the allocation by the corrective amendment must remain throughout the end of 2006 (assuming that this is 2005 being tested).

Well, that's a new one on me.

Care to share with us a citation for your assertion that "the class of participants brought into the allocation by the corrective amendment must remain thoughout the end of 2006.."?

[ERISAnut]

Another option would be a corrective amendment to bring more participants into the allocation. If this is used, the class of participants brought into the allocation by the corrective amendment must remain throughout the end of 2006 (assuming that this is 2005 being tested).

Well, that's a new one on me.

Care to share with us a citation for your assertion that "the class of participants brought into the allocation by the corrective amendment must remain thoughout the end of 2006.."?

I'm sorry. I was actually typing without thinking on that one. The rule I was quoting here applies to a corrective amendment to cure discriminatory availability of a benefit, right, or feature. I appologize for that. What I should've said was to be sure the corrective amendment to bring additional classes of employees in applies only to the year being corrected.

[ERISAnut]

4) There were some participants who were employed on the last day who worked less than 1000 hours that were excluded from this allocation. However, because of the top-heavy requirements received a top heavy minimum allocation of 3%.

You've got it pretty much nailed down.

One part that I realized I left out after reading your summary is that the entrance requirements for the 401k are much more lenient than the profit sharing and thus the number of people brought in for the top heavy minimum is fairly large. Additionally their ages in relation to everyone else makes that 3% more valuable and increasing it makes more of a difference when using accrual factors.

So, it's my hope to piggyback off the ability to simply increase the TH minimum contribution rather than amend plan to bring in people for 2 years when it shouldn't be necessary to go through this next year or even raising the base percentage which actually doesn't help me based upon the company census.

So that's my question...can I influence the 401(a)(4) testing by increasing the TH percentage rather than amending the plan. And, if so, is it capped? Could I theoretically go higher than that 8% base allocation figure?

I see where you are going and will try to answer the questions listed below.

Going higher on the 8% base allocation figure? This is an option provided the formula is discretionary. If increasing the base percentage to only those who meet the last day-1000 hours requirement will help pass, the you certainly have the ability to do that without violating the "definitely determinable formula rule).

As for increasing the TH percentage for those employees who receive only the TH minimum. Won't work for a couple of reasons. 1) It is no longer a top heavy requirement and would itself become an additional allocation formula to a unique group of people; who happen to be lower compensated due to the fact that they haven't even worked 1000 hours during the year. This is majorly aggressive and would to more harm that good. This amendment, instead, may be written to require only last day of employment as a requirement to receive the allocation. As stated in my last post, make sure the amendment is written to apply only to the year being corrected. Didn't mean to confuse the issue (due to a temporary brain-cramp).

If you are mapped to a prototype plan, you should make sure the plan hadn't elected the fail safe provisions which automatically brings in additional employees in order to pass 410(b) by use of the Coverage Ratio Test. I feel bad that I actually misquoted the BRF corrective amendment for this scenario.

[Mike Preston]

ERISAnut, thanks for the clarification. We all cramp from time to time.

But I've got another one.....

As for increasing the TH percentage for those employees who receive only the TH minimum. Won't work for a couple of reasons. 1) It is no longer a top heavy requirement and would itself become an additional allocation formula to a unique group of people; who happen to be lower compensated due to the fact that they haven't even worked 1000 hours during the year. This is majorly aggressive and would to more harm that good.

Emphasis added by me.

I completely disagree with the bolded statement. Making an amendment which benefits a group of NHCE's is fundamentally impossible to ring the discrimination bell, except in the rarest and most abusive situations. The Gold "short service" memo is my citation. There is absolutely no evidence in this case that providing the individuals that worked less than 1000 hours with a "top-up" benefit of any kind (through an amendment) would be "majorly aggressive". And there certainly is no evidence that it would do more harm than good.

It could very well be just what is required to make the average benefits test pass, which, in turn, then allows the plan to satisfy 410(b) without breaking a sweat.

[Tom Poje]

based on what was said:

more than 30% of the people received top heavy (or terminated with more than 500 hours and received no contribution)- otherwise I don't see how you can say you fail 410(b). that sounds like an awful high %.

if that is true then lets take a look at an individual making 110,000 (using 90,000 as my integration level) they would receive

8800 + 1140 or 9940, which is 9.94% of pay.

1/3 of that is 3.31%.

that means if (and I stress 'if') you were to go the cross tested route you would be 'required' to increase the contribution of all top heavy people to satisfy the gateway.

[Guest lskin]

I've got a question? Why if the plan is top heavy do you have to give a 3% contribution to employees who left before the last day of the year ? I thought if you used a nonstandardized plan that they did not have to get any employer contributions.

[ERISAnut]

I've got a question? Why if the plan is top heavy do you have to give a 3% contribution to employees who left before the last day of the year ? I thought if you used a nonstandardized plan that they did not have to get any employer contributions.

You're not. Your only providing the TH minimum to those participants who were employed on the last day of the plan year. This issue is that the plan formula is providing contribution to only those employees who worked at least 1000 hours AND were employed on the last day. The plan formula fails 410(b). When performing the general test, you are now bringing in the TH minimums that were given to only those participants who were employed on the last day, but failed to work 1000 hour (since they didn't otherwise receive the TH minimum).

[ERISAnut]

ERISAnut, thanks for the clarification. We all cramp from time to time.

I completely disagree with the bolded statement. Making an amendment which benefits a group of NHCE's is fundamentally impossible to ring the discrimination bell, except in the rarest and most abusive situations. The Gold "short service" memo is my citation. There is absolutely no evidence in this case that providing the individuals that worked less than 1000 hours with a "top-up" benefit of any kind (through an amendment) would be "majorly aggressive". And there certainly is no evidence that it would do more harm than good.

It could very well be just what is required to make the average benefits test pass, which, in turn, then allows the plan to satisfy 410(b) without breaking a sweat.

We would have to disagree on this one. I would normally take the approach of maintaining prototype status. I think the amendment that you are proposing would take the plan out of prototype status by creating separate class allocations. Also, I do stand by the my comment (but would admit that it would depend on the level of contributions being provided to these lower paid employees). I would not agree with any notion of directing large contributions to the a few lower paid people to get the test to pass.

Also, the point that Tom Poje pointed out that they are likely failing the gateway into cross-testing. There may be an amendment to increase this group to pass the gateway. Realize that nothing I say is absolute. They are all things to consider with a set of "facts and circumstances". We've all performed corrective amendments and have even written such amendments (unauthorized practice in law). These are thought process which must be considered when determining how to be correct. For the reasons mentioned, I think it is better to amend to bring employees into the formula already in place than to create an entirely different formula.

[Mike Preston]

that means if (and I stress 'if') you were to go the cross tested route you would be 'required' to increase the contribution of all top heavy people to satisfy the gateway.

Tom, I was suggesting using cross-testing to confirm that the average benefits test is satisfied. I was not suggesting the use of cross-testing for satisfaction of rate group testing under 401(a)(4). Hence, there would be no gateway requirement.

[Mike Preston]

The plan formula fails 410(b).

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

[ERISAnut]

that means if (and I stress 'if') you were to go the cross tested route you would be 'required' to increase the contribution of all top heavy people to satisfy the gateway.

Tom, I was suggesting using cross-testing to confirm that the average benefits test is satisfied. I was not suggesting the use of cross-testing for satisfaction of rate group testing under 401(a)(4). Hence, there would be no gateway requirement.

Not exactly correct. You can apply the average benefits testing without cross-testing. But when you cross-test, the gateway automatically applies (unless a broadly available exception or primarily DB in Nature exceptions applies). No exceptions to this would seem to be applicable here.

[ERISAnut]

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.

[Mike Preston]

ERISAnut, thanks for the clarification. We all cramp from time to time.

I completely disagree with the bolded statement. Making an amendment which benefits a group of NHCE's is fundamentally impossible to ring the discrimination bell, except in the rarest and most abusive situations. The Gold "short service" memo is my citation. There is absolutely no evidence in this case that providing the individuals that worked less than 1000 hours with a "top-up" benefit of any kind (through an amendment) would be "majorly aggressive". And there certainly is no evidence that it would do more harm than good.

It could very well be just what is required to make the average benefits test pass, which, in turn, then allows the plan to satisfy 410(b) without breaking a sweat.

We would have to disagree on this one. I would normally take the approach of maintaining prototype status. I think the amendment that you are proposing would take the plan out of prototype status by creating separate class allocations. Also, I do stand by the my comment (but would admit that it would depend on the level of contributions being provided to these lower paid employees). I would not agree with any notion of directing large contributions to the a few lower paid people to get the test to pass.

Also, the point that Tom Poje pointed out that they are likely failing the gateway into cross-testing. There may be an amendment to increase this group to pass the gateway. Realize that nothing I say is absolute. They are all things to consider with a set of "facts and circumstances". We've all performed corrective amendments and have even written such amendments (unauthorized practice in law). These are thought process which must be considered when determining how to be correct. For the reasons mentioned, I think it is better to amend to bring employees into the formula already in place than to create an entirely different formula.

I suppose agree to disagree is the correct phrase.

1) I searched for "prototype" in the prior messages and couldn't come up with that word except in your messages. Why are you attempting to retain a status that isn't evident from the discussion at hand? However, even if you are correct (from some prior knowledge not shared with the rest of us) I vehemently disagree with your approach. The "cost" of elimination of prototype status is a few thousand dollars, at most; and that is if you submit as an individually designed plan (wouldn't it be smarter just to arrange for a volume submitter plan that has the language you want?). If we are talking about just 1% of pay being allocated across the board, even with only 10 participants with average compensation of $25,000, we are talking about a $2,500 "cost". And from what I can gather we are talking about much, much, much larger numbers. And, even if we are talking about a prototype, there really isn't much to say, is there? Don't prototypes have fail-safe language in them which mandates what can/must be done to cure this type of problem? Basically, my responses were not based on prototype status either being initially in play or being something worth saving when dealing with this sort of situation. I note that you waffle by saying that you want to retain prototype status but then saying that it would depend on the numbers. So maybe we are actually in agreement and you just think the numbers are a lot smaller than I think they are. Fair enough. That is why I said we need, at the least, body counts.

2) "I would not agree with any notion of directing large contributions to the a few lower paid people to get the test to pass." Why not? If it makes the test pass, and it is otherwise not problematic to the company in terms of employee relations, why is this particular methodology something that you feel so strongly about? Are the thousands of plans that have used this approach over the last 10 years or so somehow in danger of being disqualified? Why? Citation, please. I am rather vehement about this because there are many in the industry who have gone to great lengths to see where it is appropriate to draw the lines and it is bad enough when rogue IRS agents begin to regulate from the hip by stating that their own regulations don't mean what they say. When I hear it from somebody within the industry, it rankles. Now, if you want to tell your client that you think the methodology is "unfair" and that you don't think it is appropriate, from an employee relations perspective, I have absolutely no problem with that. When you talk about it in a way that makes it seem like it is contrary to all that is good and right, I see red.

[Mike Preston]

that means if (and I stress 'if') you were to go the cross tested route you would be 'required' to increase the contribution of all top heavy people to satisfy the gateway.

Tom, I was suggesting using cross-testing to confirm that the average benefits test is satisfied. I was not suggesting the use of cross-testing for satisfaction of rate group testing under 401(a)(4). Hence, there would be no gateway requirement.

Not exactly correct. You can apply the average benefits testing without cross-testing. But when you cross-test, the gateway automatically applies (unless a broadly available exception or primarily DB in Nature exceptions applies). No exceptions to this would seem to be applicable here.

ERISAnut, please, please, please review prior threads on this issue. It is a settled issue and your understanding is incorrect. The use of crosstesting in the average benefits test does not, in any way, shape or form, cause the gateway requirements to come into play. The regs say it. The IRS has confirmed it at many, many conferences. If you think otherwise, please provide a citation.

[Mike Preston]

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.

I don't disagree with anything you have said. Are you disagreeing with something I said? Perhaps a set of numbers will convince you? As I said earlier, we need body counts to give a better idea as to where things should really go from here. Assume there are 70 participants that "count" for 410(b) purposes and 23 of them are not benefitting because they either are not receiving an allocation at all because they terminated before the end of the year or they are getting only the top-heavy minimum. If I run the whole thing through the average benefits test (using any methodology allowed, including crosstesting) and find that the average benefits test is satisfied, then the plan's regular allocation formula (5.7% up to wage base + 13.7% above) satisfies 410(b) because it covers 47/70, which is 67%. 67% is greater than the safe-harbor percentage, since the safe-harbor percentage can't be greater than 50%.

What part of my calculations do you disagree with?

[ERISAnut]

I do not agree with two parts (one seemed to be a typo).

1) The formula would be 8% up to the wage base and 13.7% above. The excess amount cannot exceed the base amount. The additional excess is limited to 5.7%. I am assuming this was a typo.

2) You just performed a partial calculation of the nondiscriminatory classification test (which is only one of two requirements for the average benefits test).

The rule is you must pass the coverage ratio test or both the nondisc class and avg benefits test.

Regardless of which test you run, you are comparing the PERCENTAGE of the HCE's who benefit to the PERCENTAGE of the NHCE's who benefit. Just saying that 67% of the entire population benefited doesn't say anything. Now, if you had proven that 70% of all nonexcludable NHCE's benefited, then I would agree with you. For now, we disagree.

[ERISAnut]

that means if (and I stress 'if') you were to go the cross tested route you would be 'required' to increase the contribution of all top heavy people to satisfy the gateway.

Tom, I was suggesting using cross-testing to confirm that the average benefits test is satisfied. I was not suggesting the use of cross-testing for satisfaction of rate group testing under 401(a)(4). Hence, there would be no gateway requirement.

Not exactly correct. You can apply the average benefits testing without cross-testing. But when you cross-test, the gateway automatically applies (unless a broadly available exception or primarily DB in Nature exceptions applies). No exceptions to this would seem to be applicable here.

ERISAnut, please, please, please review prior threads on this issue. It is a settled issue and your understanding is incorrect. The use of crosstesting in the average benefits test does not, in any way, shape or form, cause the gateway requirements to come into play. The regs say it. The IRS has confirmed it at many, many conferences. If you think otherwise, please provide a citation.

Mike Preston, what do you propose the "gateway" is to. It's a gateway into "cross-testing" when benefits aren't made on a broadly available basis or the benefits aren't primarily DB in Nature. The term "gateway" means gateway into cross-testing. You and I will agree to disagree on this one.

[Mike Preston]

I do not agree with two parts (one seemed to be a typo).

1) The formula would be 8% up to the wage base and 13.7% above. The excess amount cannot exceed the base amount. The additional excess is limited to 5.7%. I am assuming this was a typo.

2) You just performed a partial calculation of the nondiscriminatory classification test (which is only one of two requirements for the average benefits test).

The rule is you must pass the coverage ratio test or both the nondisc class and avg benefits test.

Regardless of which test you run, you are comparing the PERCENTAGE of the HCE's who benefit to the PERCENTAGE of the NHCE's who benefit. Just saying that 67% of the entire population benefited doesn't say anything. Now, if you had proven that 70% of all nonexcludable NHCE's benefited, then I would agree with you. For now, we disagree.

Yes, it should have been 8% + 13.7%

I will stipulate that the coverage ratio test (the 70% test) is not satisfied. I am presuming that the plan covers 100% of the employee population - that is all the HCE's and all the NHCE's. I am presuming that 100% of the HCE's benefit at the highest rate. I am presuming that the only participants that do not benefit (either because they actually do not benefit or that they received only the top heavy minimum) are NHCE's. So, forget the body counts, and go with the percentages. I am saying that 67% of the NHCE's are receiving an allocation under the 8% + 13.7%. I am saying that the average benefits test is satisfied (pretend for now that it is passed using a methodology you approve of). I am saying that if the average benefits test is satisfied, then a plan that covers 67% of the entire NHCE population is guaranteed to satisfy 410(b).

All that is left is to convince you that use of crosstesting in the average benefits test does not give rise to a requirement to satisfy the gateway rules.

I'll go look up at least one quote from the IRS on this issue.

You are not alone in your misunderstanding of the rules in this area.

[Mike Preston]

Mike Preston, what do you propose the "gateway" is to. It's a gateway into "cross-testing" when benefits aren't made on a broadly available basis or the benefits aren't primarily DB in Nature. The term "gateway" means gateway into cross-testing. You and I will agree to disagree on this one.

Here's one:

QUESTION 20 (IRS Q&A's Grey Book 2003)

Nondiscrimination: New Comparability Regulations

Do the new comparability regulations apply for purposes of the average benefits percentage test? Assume an employer sponsors both a defined benefit and defined contribution plan, each of which is tested for coverage and nondiscrimination separately, but uses the average benefits test for demonstrating compliance with the coverage requirements for one or both plans. Do the new comparability regulations affect the employer’s ability to do the average benefits percentage test on a benefits basis?

RESPONSE

No. Although Treas. Reg. 1.410(b)-5(d)(5) may be interpreted to suggest that the new comparability regulations do apply for purposes of the average benefits percentage test, the preamble to the final new comparability regulations clearly states, "These rules do not apply ...to the situation in which plans are aggregated solely for purposes of satisfying the average benefit percentage test of section 1.410(b)-5."

[ERISAnut]

Mike Preston, what do you propose the "gateway" is to. It's a gateway into "cross-testing" when benefits aren't made on a broadly available basis or the benefits aren't primarily DB in Nature. The term "gateway" means gateway into cross-testing. You and I will agree to disagree on this one.

Here's one:

QUESTION 20 (IRS Q&A's Grey Book 2003)

Nondiscrimination: New Comparability Regulations

Do the new comparability regulations apply for purposes of the average benefits percentage test? Assume an employer sponsors both a defined benefit and defined contribution plan, each of which is tested for coverage and nondiscrimination separately, but uses the average benefits test for demonstrating compliance with the coverage requirements for one or both plans. Do the new comparability regulations affect the employer’s ability to do the average benefits percentage test on a benefits basis?

RESPONSE

No. Although Treas. Reg. 1.410(b)-5(d)(5) may be interpreted to suggest that the new comparability regulations do apply for purposes of the average benefits percentage test, the preamble to the final new comparability regulations clearly states, "These rules do not apply ...to the situation in which plans are aggregated solely for purposes of satisfying the average benefit percentage test of section 1.410(b)-5."

Let's compare apples to apples. This exception to the gateway would be because the benefits provided are primarily DB in nature. Your example here includes the existence of a DB plan which makes a world of difference. Are we learning yet?

[Mike Preston]

Mike Preston, what do you propose the "gateway" is to. It's a gateway into "cross-testing" when benefits aren't made on a broadly available basis or the benefits aren't primarily DB in Nature. The term "gateway" means gateway into cross-testing. You and I will agree to disagree on this one.

Here's another: (IRS Q&A's 2002 ASPA Annual Conference)

29. An employer maintains only a profit sharing plan. The contributions under the plan do not satisfy any of the gateways under the cross-testing regulations. The plan passes the average benefit percentage test on a benefits (cross-tested) basis, but not on a contributions basis. In applying the general test to the amount of contributions, may the rate groups be tested by comparing their ratio percentages to the mid-point of the safe and unsafe harbors?

Yes.

In other words, may the plan use cross testing in the average benefits percentage test, even though it may not use cross testing in the 401(a)(4) general test itself?

Yes.

[ERISAnut]

Mike Preston, what do you propose the "gateway" is to. It's a gateway into "cross-testing" when benefits aren't made on a broadly available basis or the benefits aren't primarily DB in Nature. The term "gateway" means gateway into cross-testing. You and I will agree to disagree on this one.

Here's another: (IRS Q&A's 2002 ASPA Annual Conference)

29. An employer maintains only a profit sharing plan. The contributions under the plan do not satisfy any of the gateways under the cross-testing regulations. The plan passes the average benefit percentage test on a benefits (cross-tested) basis, but not on a contributions basis. In applying the general test to the amount of contributions, may the rate groups be tested by comparing their ratio percentages to the mid-point of the safe and unsafe harbors?

Yes.

There is safe harbor and unsafe harbor. Anything above the safe harbor is fine in the avg. benefits test. Anything below the safe harbor is not fine. Anything in between is subject to facts and circumstances. Whenever you are rate group testing, you MUST use the midpoint between safe harbor and unsafe harbor. That does not say anything about being exempted from the gateway.

[Mike Preston]

Let's compare apples to apples. This exception to the gateway would be because the benefits provided are primarily DB in nature. Your example here includes the existence of a DB plan which makes a world of difference.

What exception are you talking about? I'm not talking about an exception. I'm saying that the gateway requirements do not apply. You don't need an exception when the gateway rules don't even apply. Remember, I'm not running my rate group testing on the basis of crosstesting. I'm just using plain contributions rate testing.

Are we learning yet?

I don't know, are we?

At this point, I'll not endeavor to educate you any further, as I believe the issues have been exposed for all to see and people can make their own judgments.

If others want to chime in, that is fine with me.

[ERISAnut]

Let's compare apples to apples. This exception to the gateway would be because the benefits provided are primarily DB in nature. Your example here includes the existence of a DB plan which makes a world of difference.

What exception are you talking about? I'm not talking about an exception. I'm saying that the gateway requirements do not apply. You don't need an exception when the gateway rules don't even apply. Remember, I'm not running my rate group testing on the basis of crosstesting. I'm just using plain contributions rate testing.

Are we learning yet?

I don't know, are we?

At this point, I'll not endeavor to educate you any further, as I believe the issues have been exposed for all to see and people can make their own judgments.

If others want to chime in, that is fine with me.

Apparently not. The key is not to attempt to read regs applying to one issue and gain a false interpretation of an entirely separate issue. It is easy to make that mistake. I even inadvertantly misapplied the corrective amendment duration period for Benefits, Rights, and Features to a corrective amendment for a failed test without thinking. It happens. But the point is it to be careful of what is being intended. The entire purpose of the gateway was eliminate abuse of easily passing tests without providing significant benefits to NHCE's. If you would simply run a average benefits test in order to avoid the gateway, then it would defeat the purpose of having a gateway requirement. Once you work through the complexity of how the regs are written, it will actually begin to make sense; thereby reducing the tendency to apply one answer to an entirely different set of circumstances.

[Mike Preston]

There is safe harbor and unsafe harbor. Anything above the safe harbor is fine in the avg. benefits test. Anything below the safe harbor is not fine. Anything in between is subject to facts and circumstances. Whenever you are rate group testing, you MUST use the midpoint between safe harbor and unsafe harbor. That does not say anything about being exempted from the gateway.

OK, I lied. I'm back. The above needs clarification, lest somebody stop by and actually believe it means something.

"There is safe harbor and unsafe harbor."

Uh....ok....I think I can get on board with that sentence.

"Anything above the safe harbor is fine in the avg. benefits test."

If that sentence is meant to convey meaning, it hasn't done its job very well. The average benefits test is a simple, straightforward comparison of the average, uh, benefits. If the average for the NHCE's is at least 70% of the average for the HCE's the avg. benefits test is satisfied. It is only once someone has satisfied the average benefits test that a ratio-percentage of less than 70% can be used in other tests that need to be done.

Consider it this way:

1) Do I pass the average benefits test? If no, when performing a 410(b) test I am stuck with 70%. If yes, I can use the safe-harbor percentage.

2) Do I pass the average benefits test (same one as above)? If no, when performing rate group testing under 401(a)(4) I am stuck with 70%. If yes, I can use the mid-point in my testing.

We aren't talking about (2). We are talking about having the "plan" satisfy 410(b). If it does, then there is absolutely no need to test under 401(a)(4) because the formula is a safe-harbor formula.

[ERISAnut]

There is safe harbor and unsafe harbor. Anything above the safe harbor is fine in the avg. benefits test. Anything below the safe harbor is not fine. Anything in between is subject to facts and circumstances. Whenever you are rate group testing, you MUST use the midpoint between safe harbor and unsafe harbor. That does not say anything about being exempted from the gateway.

OK, I lied. I'm back. The above needs clarification, lest somebody stop by and actually believe it means something.

"There is safe harbor and unsafe harbor."

Uh....ok....I think I can get on board with that sentence.

"Anything above the safe harbor is fine in the avg. benefits test."

If that sentence is meant to convey meaning, it hasn't done its job very well. The average benefits test is a simple, straightforward comparison of the average, uh, benefits. If the average for the NHCE's is at least 70% of the average for the HCE's the avg. benefits test is satisfied. It is only once someone has satisfied the average benefits test that a ratio-percentage of less than 70% can be used in other tests that need to be done.

Consider it this way:

1) Do I pass the average benefits test? If no, when performing a 410(b) test I am stuck with 70%. If yes, I can use the safe-harbor percentage.

2) Do I pass the average benefits test (same one as above)? If no, when performing rate group testing under 401(a)(4) I am stuck with 70%. If yes, I can use the mid-point in my testing.

We aren't talking about (2). We are talking about having the "plan" satisfy 410(b). If it does, then there is absolutely no need to test under 401(a)(4) because the formula is a safe-harbor formula.

My point was merely to explain the fact that the Midpoint between the Safe and Unsafe Harbor is used when there is rate group testing. That's all. You know, We've all read the rules and many of us have applied to rules more than others. I will not run back to seek statute on anything I say because I am speaking from my experience in the industry. I, too, sometimes jump the gun and missapply some provisions. But when you bring a rate group question into play as your argument that the mere use of an average benefit test exempts you from the gateway requirement, then you may need more actually testing experience.

[Mike Preston]

Apparently not. The key is not to attempt to read regs applying to one issue and gain a false interpretation of an entirely separate issue. It is easy to make that mistake. I even inadvertantly misapplied the corrective amendment duration period for Benefits, Rights, and Features to a corrective amendment for a failed test without thinking. It happens. But the point is it to be careful of what is being intended. The entire purpose of the gateway was eliminate abuse of easily passing tests without providing significant benefits to NHCE's. If you would simply run a average benefits test in order to avoid the gateway, then it would defeat the purpose of having a gateway requirement. Once you work through the complexity of how the regs are written, it will actually begin to make sense; thereby reducing the tendency to apply one answer to an entirely different set of circumstances.

You and I have a fundamental disagreement. I believe the regulations mean what they say and you believe in the Chinese way of government (see your section above which I added the bold to). That is, you believe that it is not necessary to be precise because then, if you want, you can change what you meant not by re-issuing the rules with clarifications, but instead by just declaring that what you meant was different from what you wrote.

Sorry, it doesn't work that way in the US. At least, not yet.

Look, I'm sure you are a fine, upstanding citizen in some respects. So I will credit you with actually believing the drivel you are spouting about "intent".

I think you need to look at Q&A 29 again and tell us why you think it is different from the case at hand.

[ERISAnut]

So we are talking about character now?

[Mike Preston]

My point was merely to explain the fact that the Midpoint between the Safe and Unsafe Harbor is used when there is rate group testing. That's all. You know, We've all read the rules and many of us have applied to rules more than others. I will not run back to seek statute on anything I say because I am speaking from my experience in the industry. I, too, sometimes jump the gun and missapply some provisions. But when you bring a rate group question into play as your argument that the mere use of an average benefit test exempts you from the gateway requirement, then you may need more actually testing experience.

Darn, I should have recognized that at the beginning. That *MUST* be it.

[ERISAnut]

Funny. 3 pages of post debating a simple issue. It is very easy to sit up and attempt to cherrypick statements. I find that type of activity to add confusion to those that are actually trying to make sense of processes that seem somewhat complicated.

I find most of these processes simple and not worthy of debate. So I trying to explain in layman's terms and eventually misquote topics. When I do, there's always someone (obviously inexperienced) coming along with their book of regs and posting different sections. I've been there and done that. Now, to me, it is a process of operating a plan to meet the qualification requirements. This is my passion and I decide to share it.

You remind me a little of myself when I first started out in the industry 15 years ago. Everything had to be antagonized and supported by regs. The problem with that, again, is that you sometime apply a certain reg to the wrong set of circumstances. This is a reflection of your weakness, not mine.

Being experienced in the industry, I have corrected ERISA Attorneys, and have been corrected by ERISA attorneys; the latter more often than the former. But as you gain more experience, you realize it is not being right or wrong, but providing newbies with lesser experience explanations of processes that may otherwise not jive. This is clearly not your intent.

Also, sorry about the egg that going to be on your face when you first realize that the gateway into cross-testing applies unless the benefits are primarily DB in nature or the allocations are made on a broadly available basis.

[WDIK]

So we are talking about character now?

http://benefitslink.com/boards/index.php?s...ndpost&p=131957

Mike, I'm sorry that you find yourself in such poor company as mine.

[Mike Preston]

Funny. 3 pages of post debating a simple issue. It is very easy to sit up and attempt to cherrypick statements. I find that type of activity to add confusion to those that are actually trying to make sense of processes that seem somewhat complicated.

I find most of these processes simple and not worthy of debate. So I trying to explain in layman's terms and eventually misquote topics. When I do, there's always someone (obviously inexperienced) coming along with their book of regs and posting different sections. I've been there and done that. Now, to me, it is a process of operating a plan to meet the qualification requirements. This is my passion and I decide to share it.

You remind me a little of myself when I first started out in the industry 15 years ago. Everything had to be antagonized and supported by regs. The problem with that, again, is that you sometime apply a certain reg to the wrong set of circumstances. This is a reflection of your weakness, not mine.

Being experienced in the industry, I have corrected ERISA Attorneys, and have been corrected by ERISA attorneys; the latter more often than the former. But as you gain more experience, you realize it is not being right or wrong, but providing newbies with lesser experience explanations of processes that may otherwise not jive. This is clearly not your intent.

Also, sorry about the egg that going to be on your face when you first realize that the gateway into cross-testing applies unless the benefits are primarily DB in nature or the allocations are made on a broadly available basis.

Well, I guess I'll have to wait on that a bit.

I think your posts speak for themselves. As do mine.

You and I have a fundamental disagreement about how the non-discrimination regulations are meant to be applied. Your position is irrational, in my view. I'm sure mine is just as irrational in your view.

You choose, at this point, to dismiss all argument as being essentially beside the point. I'll interpret that to mean that you have recognized the futility in disputing that which has been understood by everybody who actually practices in this area since 2002.

I hope you do bother, at some point, to confirm with the IRS that their position, as stated in Q&A 29 previously quoted, is still valid. At least for your clients' sake, if not for your own.

[ERISAnut]

So we are talking about character now?

http://benefitslink.com/boards/index.php?s...ndpost&p=131957

Mike, I'm sorry that you find yourself in such poor company as mine.

It's like I said. It's always the weakest among us.

[WDIK]

To be more specific, the

Weakest

Dude

I

Know

[Archimage]

Maybe there is some confusion? I believe Mike is speaking specifically about passing under 410(b). Now the plan still must pass 401(a)(4) testing which could lead down the road for all of the other things Nut is trying to explain.

Am I right Mike or am I missing something?

[Mike Preston]

So we are talking about character now?

http://benefitslink.com/boards/index.php?s...ndpost&p=131957

Mike, I'm sorry that you find yourself in such poor company as mine.

Happy to be there. Thanks for the reference. Now that I know he worked for the DOL I appreciate where he is coming from. He really does believe that there are general principles that apply, that there is really no need for specific rules, except to the extent necessary to confuse the court system into agreeing with whatever the government believes is appropriate at that point in time.

Keep in mind that he only has 15 years of experience, so he may need to inquire of others what the non-discrimination rules were before the regulations under 401(a)(4) were published and why the regulations were published in the form that they were.

With that additional information available to him, he seems intelligent enough to understand the ramifications.

But having worked for the government as a DOL investigator, he also most assuredly knows about the ability of the government to put the squeeze on plan sponsors to get what they want, notwithstanding any silly written rules that might exist to the contrary.

A very dangerous attitude, of course, but one that the private sector has had to deal with since time immemorial.

[Mike Preston]

Maybe there is some confusion? I believe Mike is speaking specifically about passing under 410(b). Now the plan still must pass 401(a)(4) testing which could lead down the road for all of the other things Nut is trying to explain.

Am I right Mike or am I missing something?

I don't think there is any confusion.

But since he is refusing to actually address any of the arguments head on, I can't be sure.

It is clear that ERISAnut believes that use of crosstesting in establishing a plan sponsor's satisfaction of the average benefits test is enough to taint all plans of that employer such that they are then subject to the gateway. I am of the belief that an employer's satisfaction of the average benefits test by use of crosstesting has zero impact on whether or not a plan (or plans) of the employer are subject to the gateway.

Initially, I think we are both talking about 410(b). At least we are insofar as use of the average benefits test being used to justify the use of a percentage less than 70% to satisfy said 410(b). I think he agrees with me that the lowered threshold, assuming satisfaction of the average benefits test, is the safe-harbor percentage for 410(b) purposes.

I think he agrees with me that, if the average benefits test is satisfied, that the plan would then satisfy 410(b). However, he feels that even if the plan satisfies 410(b), it would then be necessary for the plan to satisfy 401(a)(4). And, when testing under 401(a)(4), he feels that since the plan is subject to the gateway, it will fail 401(a)(4).

He is wrong about how the plan satisfies 401(a)(4), of course. For two reasons:

1) First, given that the plan satisfies 410(b), as it is currently drafted, it satisfies 401(a)(4) automatically because it is a safe-harbor design. He doesn't "like" the fact that a plan that satisfies the average benefits test via crosstesting does not give rise to a gateway requirement. Hence, he therefore says that it just can't be possible for this plan (a safe-harbor design) to satisfy 401(a)(4) as a safe-harbor just because it satisfies satisfies 410(b) (taking into account only those who benefit at the higher level provided by the integrated allocation). I find this logic to be indicative of a deep-seated misunderstanding of the rules. He admits to this, by waving his arms and saying that those of us that actually pay attention to the rules, rather than the overriding "principles" are naive. I beg to differ.

2) Let's assume, for argument's sake, that a plan that satisfies 410(b) by use of the average benefits test somehow disengages the plan's ability to be treated as a safe-harbor under 401(a)(4). Incredible as that may seem, let's roll with it. So, let's assume that we need to test the allocations under 401(a)(4). I'm going to submit that this plan will satisfy 401(a)(4) without using cross-testing. I'm going to submit that the group of people getting the integrated allocation (excluding all others) satisfies 401(a)(4). Certainly all of them are in the same rate group. The only question is whether that group satisfies the non-discriminatory classification test. For this purpose, we perform the same test that we used to determine whether the plan satisfied 410(b), only instead of using the safe-harbor percentage, we use the midpoint. Since we passed using the safe-harbor, we must pass using the midpoint, because the safe-harbor is always higher than the midpoint.

The only reason why the plan wouldn't satisfy 401(a)(4) in this case is if the testing of the rate groups *using allocation percentages, not EBAR's* is still subject to the gateway.

I think ERISAnut is on board with all of this other than the conclusion.

But then again, he may waive his arms and come to an entirely different conclusion if he doesn't like the result reached.

[ERISAnut]

We are talking about an employer that sponsors only one DC plan, so not need to further confuse the issue.

Also, we are distinguishing certain rules that should be communciated separately when speaking of testing a plan for non-discrimination.

1) Plan must pass coverage ratio test (this may be done either by allocation rate or cross-testing).

2) If plan fails coverage ratio test, then plan must pass both the average benefits test and the nondiscriminatory classification test. (these also may be done by allocation or cross testing)

3) We are still talking about only one plan that is a DC plan.

4) If you use cross-testing in any of these test (coverage ratio or average benefits) then you must satisfy the gateway into cross-testing provided that the allocation doesn't meet the broadly available exception.

5) Since we are talking about one DC plan, we know the benefits aren't primarily DB in Nature and we aren't testing a DB and DC plan under the average benefits test.

See how clearly I articulate rather complex issue in simple terms. There's no need for confusion for those who are trying to learn what this stuff is about. Anyone can reference as they wish to arrive at their conclusions. My contention is that when it does get reasearched, these rules will begin to make sense. We have just taken 3 pages to explain something where my initial attempt was, obviously, to break the question down and analyze the different concepts that work simulateously to keep the plan qualified. This, again, is done through experience, not by running and research every statement for a challenge. This leads people who are knowledgeable about certain topics to "not post" because of being antagonized by simple terms. We have already gotten off the original subject for someone who had trouble articulating and simple situation. In my first post in the topic, I re-articulated everything to ensure everyone understood the question being asked to we should share thoughts. This is the experience which makes my career more enjoyable.

[Mike Preston]

This is the experience which makes my career more enjoyable.

So, now we have determined that you, in some sense, get some sort of satisfaction out of confusing the issues and spouting untruths.

If that is what floats your boat, that's fine.

But don't expect those of us who actually know how the rules work and who actually know how the rules are supposed to work not to take you to task each and every time you spew your misinformation.

See how clearly and succinctly I articulated your malicious intent?

I have never, in all my years, heard anybody say (except you) that using the Code and regulations as sources should be subordinate to one person's understanding of what was actually "intended". In a world such as ours (the pension world) that is pretty close to a child putting his hands over his ears and screaming "la...la...la...la...la.." at the top of his lungs.

In case you haven't ever read them, the regulations which you so quickly dismiss are over 300 pages long. And, in case you didn't read the original version, the first version was over 600 pages long.

For you to say that the regulations and the Code mean nothing is so far beneath the standard of care for our industry that I'm embarrassed FOR you.

You want everything to be simple, but you can't even understand the simplest of concepts (crosstesting in the average benefits test under 410(b)(5) does not impact the gateway requirement of 401(a)(4) - see how simple that was?).

Once you accept that a regulation under 401(a)(4), as clarified by the preamble to said regulation (I know, I know...you can't be bothered to actually read the regulations or the preambles because you know what they meant to say, whether or not they said it) does not in any way say that the use of crosstesting under another section of the code/regulations (410(b)(5)) impacts how the tests under 401(a)(4) are to be run, then things can get simple again.

Better than that, they can get back to providing accurate information.

You still have not answered why Q&A 29, which is dealing solely with a single PS plan (as the example we are discussing only deals with a single PS plan) was answered with a "Yes" by the IRS.

Think you could give that a go?

[ERISAnut]

The reason that I do not answer it is because I do not need to. Remember, this isn't about me. I do not feel inclined to run the the reg book prior to posting in the forum. I answer based on my understanding of the rules on items I previously research.

The one thing that I don't do is wait for someone to provide insight into a question and then antagonize. We can share thoughts and ideas, nor not, and it simply makes no difference to me. I simply provide my input and give those of you who are less experience something to consider. I some cases, I may be wrong. In this case; I am not. I can, at least, admit when I am mistaken or mixed up on something in the spirit of learning. At any rate, I am way beyond the point of running to the regs to show everyone I can find a stipulation, because answering these questions do not increase my salary.

With that said, I am glad to see you are still confused that the gateway is totally separate form of testing which must be passed in order to valid cross-testing. This is, of coarse, with the exception of benefits being primarily DB in nature or the broadly available requirement that I already mentioned many times before.

Since you're so proficient at running to the regs, you shouldn't have a problem finding this one.

[ERISAnut]

I actually took about 2 minutes to find somthing for you.

1.401(a)(4)-8(b)

Write this section of the regs on a napkin and use it to wipe the egg off your face.

[Mike Preston]

I actually took about 2 minutes to find somthing for you.

1.401(a)(4)-8(b)

Write this section of the regs on a napkin and use it to wipe the egg off your face.

How do I get to 1.401(a)(4)-8(b) if my plan satisfies 1.401(a)(4)-2(b)? That is, assuming the plan as designed is a safe-harbor plan, why would I ever have to look at the rules on cross-testing in 1.401(a)(4)-8?

[Mike Preston]

The reason that I do not answer it is because I do not need to.

So, you are saying that the IRS is wrong on this one, right?

[ERISAnut]

I actually took about 2 minutes to find somthing for you.

1.401(a)(4)-8(b)

Write this section of the regs on a napkin and use it to wipe the egg off your face.

How do I get to 1.401(a)(4)-8(b) if my plan satisfies 1.401(a)(4)-2(b)? That is, assuming the plan as designed is a safe-harbor plan, why would I ever have to look at the rules on cross-testing in 1.401(a)(4)-8?

Because in order to rely on cross-testing to satisfy any of the tests under 410(b), whether it be the coverage ratio test or the average benefits test, you must first satisfy the gateway. You do not, as you claimed, get an exemption from the gateway merely because you are using the average benefits test to pass 410(b).

Again, are we learning yet?

[ERISAnut]

The reason that I do not answer it is because I do not need to.

So, you are saying that the IRS is wrong on this one, right?

You don't have to cherry pick statements made. I wrote my response in the entire post. I am stating that I will not run to the regs to research every single item posted on the forum. I will provide an answer as I understand it. If an understanding is not precise, or a little unclear, a simple question or a correction would suffice. The idea of posting different sections of code (or regs) in an attempt to grandstand doesn't really help anyone who reads this thing; especially when the code or regs do not properly apply to the question at hand.

Take a look back at the original questions being asked. How did the become a debate about the gateway? The initial question was concerning how a plan is failing 410(b) because of the last day 1000 hour requirement and wanted an efficient way to correct the test. My suggestion was to bring additional participants into the plan formula that was already in place as opposed to creating a separate allocation group; because that may be aggressive and lead to other issues. Whether you agree or disagree is fine. It's not worth an argument or heated exchange of words. It's like I stated earlier, I have correct and have been corrected. Maybe corrected more often than I corrected. But I do not pretend to know something that I do not by tauting different sections of the regs on everything I write. It's not that serious to me.

I did make an exception with the rule on the gateway. Perhaps you familiarize yourself with it and consider yourself educated. Glad I could help.

[Mike Preston]

How do I get to 1.401(a)(4)-8(b) if my plan satisfies 1.401(a)(4)-2(b)? That is, assuming the plan as designed is a safe-harbor plan, why would I ever have to look at the rules on cross-testing in 1.401(a)(4)-8?

Because in order to rely on cross-testing to satisfy any of the tests under 410(b), whether it be the coverage ratio test or the average benefits test, you must first satisfy the gateway.

I sure can't find any provision in 410(b) that says that. And in light of the preamble in the regulation and the IRS responses at various conferences, I guess the IRS thinks you are wrong.

That is good enough for me.

So, unless you can find a cite, I guess we'll just have to agree that you are wrong.