Mike Preston

Yes, it must be reclassified; and leaves him a deferral limit of $20,000 (less the reclassified catchup amount) for 2006. This would be different had he deferred during the first part of 2006, as his deferral limit for the year would have remained at $20,000. I am scating around the numbers as I do not know the "earnings" portion of your figure. Can you explain how the "earnings" portion of the figures makes any difference, at all, to the determination of remaining catchups? Or how said portion might be relevant to the poster's question at all?

The average benefits test needs to parallel your 401(a)(4) testing methodology when dealing with entry date provisions. This means that there are, indeed, two average benefits tests in the rare circumstance that you are permissively disaggregating the statutorily includables from the statutorily excludables. This has been discussed at length on BenefitsLink before, and given that it is well settled, I'm confident that the NUT will find some reason to say that everybody here is wrong on that score, too. In the vast majority of cases, it is in your best interest to run a single average benefits test, though. This is because you end up with those 3 late 70's birth dates in your test, which when applied on a crosstested basis, the test almost invariably passes. But that brings us full circle to whether doing such causes the gateway requirement to kick in for you. I couldn't quite understand all of the numbers you posted, so I'll elaborate here, if you don't mind. You say that there are 22 non-excludables, 16 of which are receiving an allocation, and 6 of which are terminated with more than 500 hours. You also say there are 7 people in the TH group and 4 in the not eligible group not otherwise included in the 6 who are terminated with more than 500 hours. That means you have 22 plus 11, which is 33, but you say you have 36 total employees. Can you tell me what I've missed? And while I'm at it, and I know this is going to sound sort of condescending, but there really isn't any way to mention this without doing so, you say that the Average Benefits is 4.12/6.73, for a percentage of 61.2%. This *was* run by including the deferrals, right? If not, please rerun it with deferrals and let me know what it looks like. Sorry, but I had to ask. Oh, one more thing. Your plan seems to have wording that appears to allow for a th minimum in excess of 3%. I think you will find if you look into it, that the language you are looking at is intended to cover a circumstance that you aren't in. For example, if the plan were part of a DB/DC combo you might find that 5% is the top heavy minimum. I don't think you can, arbitrarily, increase the th minimum to something higher than what it really is. So if you only have one plan, 3% is the max. Now, can you amend your volume submitter to define the TH minimum as 4% notwithstanding the fact that this will be an amendment which is outside the approved volume submitter thresholds? Sure. And if the IRS considers it a non-substantive change, you can even keep your volume submitter status. However, you would lose your reliance on safe-harbor because I don't think the safe-harbor exception extends to "just any old formula". I think it only extends to the TH requirement. I might be wrong on this, though, so somebody should look that up. Losing your safe-harbor isn't the worst thing in the world, though, because as we have seen, your plan will satisfy 401(a)(4) easily once you satisfy 410(b).

Which brings us to the real world application where the business owner hires the beautiful young gals (legal age of course) to be his receptionist and payroll clerks and then tells his spouse that he has to otherwise they wouldn't be able to maximize their retirement plans. I'm sure it's not the intent of the IRS to do that...but who am I to argue with the results. But I digress....Mike, what you are saying is that as you get smaller and smaller doesn't it become necessary to become flexible with entrance requirements to ensure 410(b) passage, correct? flexible as in immediate eligibility? Actually, there is a real world case where somebody, somewhere put themselves in the business of arranging for the temporary hire of high school age individuals for the sole purpose of satisfying the tests. This is, even in my opinion, abusive and is what the previously mentioned (by me) Gold Memo targets. However, in your case, if the receptionist is a legit employee, the husband is making a strong case, in my opinion. Great example. I'm not sure I agree with the rationale, but I agree with the conclusion. Certainly, since this is a demographically influenced test, as the numbers get smaller one has increasing variance. If just one participant is different from the prior year, the testing results can be dramatically different. So, yes, if the employer is willing to entertain the notion that it may be to the employer's advantage to relax the statutory entrance requirements in a given year solely for the purpose of satisfying the tests, I think that flies. The only restraint being that one can not make an amendment which is discriminatory. For example, you can't amend the plan to relax the eligibility requirements in the year that an individual buys into the practice (so that they are an HCE) and bring that person into the plan at a low rate to help your test. The way I understand the IRS' interpretation of a discriminatory amendment, it is always viewed on its own (and now I'm talking about a regular amendment, not an amendment made after the end of the year - those are called 401(a)(4)-11g amendments and they have a separate threshold to satisfy). Hence, bringing in additional NHCE's to pass your test will never be considered discriminatory. Of course, the Nut will argue with this, but that is his problem. I will agree with most of what he has said so far, though, because he has not touched on the real issue we were discussing, and other than that issue, his comments are relatively accurate. I'll respond to the ones I find questionable in another post. I'll hit a number of your individual questions here, though. Your insight into the ramifications of juggling benefits for the sake of satisfying the tests is crystallizing, based on your questions. This is a good thing. I'm still a little unclear on the plan's design and without clarity, conclusions are always suspect. I know that you have a 3 month eligibility for deferrals, but I'm not sure whether the eligibility for a PS contribution continues to be the statutory 21/1 or whether a participant who entered the plan in the year in question would be eligible for a profit sharing contribution if they had 1000 hours. I'm guessing that it is the former, not the latter (however, it rarely works that way in practice, because of entry dates - take the full time person hired 12/1/2004 and a 12/31/2005 plan year end - even if the document calls for 21/1 most still make this person eligible for the ps, even though if the statutory provisions were applied, entry wouldn't take place until 2006). For now, let's assume that there is nobody that upsets the apple cart like my hypothetical 12/1/2004 hiree. So, getting back to your insights, you are correct that your hypothetical 2080 hour employee hired in the first month of the year would indeed be eligible for the TH minimum because they were active participants in a TH plan on the last day of the year. The NUT wants you to bring in employees who are the most expensive first, in some vain attempt to satisfy his own ethereal definition of what is discriminatory. While that will most assuredly work (no way will the IRS object), unless you are bringing in people who are short service (see the Gold Memo previously referenced), you really have nothing to fear. Bring in those that are the least costly and you should be fine. If that doesn't sit well with you or the plan sponsor and the cost to put on a belt and a pair of suspenders is low, I certainly wouldn't argue against something more generous. As to your ability to "discriminate in that regard", you are free to design what you want. The requirements depend on whether the amendment is in advance of the plan's year end or in arrears. If it is in advance, it merely must not be a discriminatory amendment. If it is in arrears, it must not only be non-discriminatory, it must meet the requirements of -11g (which basically means that it must pass 401(a)(4) on its own). If you have any doubts about the propriety of such an amendment, submit it to the IRS for approval. This is where it is a judgement call. In your case, you have so few participants required to receive an additional allocation that it may not make sense to do anything other than what the NUT has suggested: be conservative, add more money to NHCE accounts than you might otherwise be required to do and sleep well knowing that the plan sponsor has saved money by not having to go through the effort of submitting. I agree with the NUT that pushing two participants from TH minimum only to full bore participation in the employer's contribution is one way to skin this particular proverbial cat. But I resubmit that I am not convinced that your plan fails 410(b). If it passed 410(b), then it is a safe harbor design and you don't have any correction to make. To complete the analysis, just make a list of the 16 non-excludables who are benefitting under the regular profit sharing allocation and list their: 1) Year of birth 2) Compensation 3) Allocation (including forfeitures, if any) 4) Deferrals Do the same thing for the the others who are in the plan at any point in time during the year (whether or not terminated), but add the following information: 5) Hours worked during the year I think your case is a great case study and I'll be happy to run the real test for you. I may be wrong, but my gut is telling me that you will pass without need of further contributions. Famous last words, right? Note that even with the above information I can not run all of the tests that I would normally run. To do that I would need 12/31/2005 account balances and compensation and allocation history for 2004 and 2003. That would allow me to also run the accrued to date test. I'll leave that one on the sidelines, if you don't mind. Don't be concerned about the flap here on BenefitsLink. It is certainly not your fault. The NUT is looking to me to be more and more dangerous, because much of what he writes is indeed correct. That lends credibility to his silly concepts of ignoring the regs and code in favor of some imprecise standard that only he can determine. I consider that extremely dangerous and will rail against it at every opportunity (as I'm doing now). If you want to send me the information in a private message rather than post that information on here, I can understand that. If you don't want to send out that data, even though it is unattributed (without participant identifying information) I can understand that, too. Whatever you decide is fine with me.

Q1 In the context of my use of the "magic number" one may not double count. However, rounding is predicated on the total. So, pretend that the magic number is 2.5. Now let's superimpose your 42 and 50 yo HCE's. You would need three 25 yo or younger to support your 42 year old. But once you have those 3, you would only need two more 33 yo or younger to support your 50 yo. As previously indicated, after imputing permitted disparity the 25 is probably 26 and the 33 is probably 34. Q2 Sure. With flying colors. To pass 401(a)(4) we are saying that, on a cross tested basis, the 5% going to the NHCE is equal to or greater than the 20% going to the HCE. Pretend that you have precisely the "magic number" required of NHCE's that are precisely 17 (or 16 if one imputes permitted disparity) years younger than their corresponding HCE's. You would then have a whole bunch of NHCE's and a whole bunch of HCE's getting precisely the same benefit. In other words the ratio of average NHCE benefit to average HCE benefit would be 100%. One only needs 70% to satisfy the average benefits test. So the example you posit presumes that the average benefits test is satisfied with a margin of 100/70, or 142+%. What happens in real life, as you have seen from the OP's question, is that there are frequently participants who, for one reason or another, don't benefit, yet count for 410(b) purposes. Including these people in the overall average (which you must do), serves to lower the 142+%. And I know you said you are mathematically challenged, but there is a symmetry here that is, mathematically speaking, quite sparkling. Once you understand it, it sends tingles up your spine. At least it does for those that are mathematically inclined. Note that if you reduce the body count in the underlying 5/20 design such that you have eliminated the maximum NHCE's allowed without failing the 70% threshold you will then end up diluting your 142% back precisely to 100%. It is like that Travelocity commercial ("ooooh...tingly"). Q3. Body count doesn't matter, as things scale automatically. In the case that you posit here, there are 10 EE's, 8 of which are NHCE, 2 of which are HCE. The concentration percentage is 80%, leading to a midpoint of 30%. 30% times 8 = 2.4 / 2 = 1.2 as your magic number. Hence, if you provide for an allocation such that the average benefits test is satisfied, you will need 1.2 NHCE's in the higher of the two HCE's rate group (that means 2) and 2.4 NHCE's in the lower of the HCE's rate group (that means 3). If the average benefits test is not satisfied, you will need 70% times 8 = 5.6 / 2 = 2.8 as your magic number. In that case, you will need 2.8 NHCE's in the higher of the two HCE's rate group (that means 3) and 5.6 NHCE's in the lower of the two HCE's rate group (that means 6).

Look at it this way. Who amongst us would want to be held in high esteem by the Nut? His ideas are truly bizarre. He believes that regulations and Code are indecipherable. Do you? Of course not. He believes that regulations and Code should be ignored in favor of some ethereal principles that only he knows. Do you? Of course not. He sees language that is crystal clear and interprets it in a bizarre manner. Do you? Of course not. I have been called inexperienced and incapable by him. Austin, welcome to the club. I am happy to line up in your camp.

What this means is that if the conversion of allocation rates into benefits is limited to testing under Section 410(b) [for the average benefits test], then the gateway doesn't apply. That is, if you convert for a reason other than 410(b) (which of course means 401(a)(4)), the gateway rules apply. I am saying that the term "sole purpose" has meaning. Otherwise, the author would've ommitted it from the statement. Your are saying that "This condition does not apply if the sole purpose for converting allocation rates into benefits is to run the benefit percentages for the ABR test" has the same meaning as "This condition does not apply if converting allocation rates into benefits in order to run the benefit percentages for the ABR test". I am saying that the term "sole purpose" has meaning. So who among us is providing the weird interpretations? You, in my opinion. If we accept your opinion that "sole purpose" has the, uh, purpose of rendering the average benefits test subject to the gateway, we find that the following sentence: "In other words, if the defined contribution plan is still being tested on the basis of contributions (i.e., looking at allocation rates) for Section 401(a)(4) purposes, but the allocations are expressed as benefits to run the ABR test to support the coverage test under IRC Section 410(b) for that plan (or for any other plan maintained by the employer), the gateway condition under Section 1.401(a)(4)-8(b)(b)(1) does not have to be satisfied." has no meaning. I'm not willing to believe that the entire sentence I repeated directly above has no meaning. I'm beginning to see a pattern. I believe that while you were in your government position, it was made clear to you that you should ignore the literal wording of the Code/Regulations and merely carry out department policy. You mistakenly believe that others should be similarly instructed and that your years of experience provide you with a looking glass through which you instinctively know what the regulators meant to say. Sorry, but that just doesn't cut it. You go from one extreme to the other. While you don't want to parse the regulations, you now want to parse an expert's description of those regulations as if he were writing regulations. As I've already stated, and as you've already disagreed, the meaning of "sole purpose" in that description is to draw a distinction between applying EBAR's for the sake of 410(b) or for the sake of 410(b) and 401(a)(4). As an educator, Sal is about the best there is. But your inability to understand his description proves that even the best educators can't reach everybody. I bid you peace. But I will not allow you to post an unanswered message that implies the gateway is required when the 401(a)(4) test, if required, is performed on the basis of contributions. The sole reason that the gateway is required is if the 401(a)(4) test is done using EBAR's when a DC plan is involved, acknowledging that even in that circumstance the gateway is not required if one meets the exceptions. To repeat using other words, the gateway is never invoked predicated on the basis of the average benefits test using cross testing.

The answer is YES. The magic number between 5% and 20% is 17 years. That is, if there are "enough" NHCE's at least 17 years younger than each HCE you posit, all tests will be satisfied. "Enough" is a function of a number of factors, such as: 1) The plan sponsor's Concentration percentage (ratio of NHCE's to HCE's) 2) Whether the average benefits test is satisfied 3) Rounding Assume 1 is 90% and 2 is YES. And let's ignore 3 for now. Then for each HCE you have identified you would need .2375 * 9 = 2.1375 NHCE's (that means 3 is your rough equivalent) who are at least 17 years younger than the HCE in question. Therefore, if the plan in question had a 45 year old HCE getting 20% of pay and at least three 28 year old NHCE's getting 5% of pay, it would work. The above is actually a simplified calculation as I ignored permitted disparity. In fact, the number is smaller than the 17 years I mentioned (think 16 instead).

Glad to see we have another confused one. Let me give you an illustration. An employer sponsors a DC plan and a DB plan. The DC passes 401(a)(4) as a safe harbor plan based on the fact that everyone received the same allocation and 70% of the NHCE's benefited under the DC. The DB plan fails the coverage ratio test; and now the Average Benefits Test will be used. Since the averge benefits test requires all plans of the employer to be tested, this will require the DB and DC plan to be included in the test. It is impossible to test these two plans under the average benefits test without crosstesting. (This does not mean that it is never possible to test under average benefits without cross-testing) Again, it is IMPOSSIBLE to test this DB and DC plan under the average benefits test without crosstesting (either convert the DB to an allocation or convert the DC to SLA at NRA). The sole purpose for converting DC into a straight life annuity would be so the plan can perform the average benefits test. This is where experience makes the difference. BOY!!! Even when faced with a direct citation, you persist in your ridiculous interpretations. The relevant sentence you are attempting to mangle is: What this means is that if the conversion of allocation rates into benefits is limited to testing under Section 410(b) [for the average benefits test], then the gateway doesn't apply. That is, if you convert for a reason other than 410(b) (which of course means 401(a)(4)), the gateway rules apply.

I think it is precisely the opposite. I pointed this issue out very early in the thread. If you would have understood it at that time, this thread would have been much different (and shorter!), and, most likely, more useful for the original poster. But I am not going to sit back and watch you give BAD/POOR advice to the readers of BenefitsLink. It has been around a long time and you are a johny-come-lately. It has been around so long because, quite simply, many refuse to allow bad advice to stand unchallenged.

It is becoming a bit clearer now. You are absolutely correct in your assumptions and incorrect on your conclusion. You believe that the citation in question, merely because it uses an example of a DB and a DC plan being tested together, does not apply to the case at hand; that is, a defined contribution plan that stands on its own. You are absolutely correct that I believe the opposite. So your protests that I've brought in an irrelevent regulation that does not apply to the case at hand is countered simply by saying that you are incorrect in your understanding of the applicability of the regulation citation in question. It most certainly does apply.

I admit that I don't understand most of what you have written, above. It is so unclear that understanding what you have written is impossible. Nonetheless, we soldier on. I don't know what you are saying above, but you have stated, over and over, that one is precluded from using crosstesting in the average benefits test if the gateway requirements aren't satisfied. I have stated just the opposite. That is, when performing the average benefits test, you can use EBAR's (that means crosstesting). There are no qualifications on my statement. One can use EBAR's. There is no requirement to meet any gateway threshold. I am going to provide you with one more citation that you probably won't bother to read. This is from the 2006 ERISA Outline, written by Sal Tripodi. Does he satisfy your definition of an expert? In any event, he writes: "Gateway requirements under section 401(a)(4) not applicable here. Under Treas. Reg. Section 1.401(a)(4)-8(b)(1)(i), a defined contribution plan is not eligible to be cross-tested for IRS Section 401(a)(4) purposes unless it satisfies a "gateway test" or one of the regulatory exceptions to the gateway test. This condition must be satisfied in order to perform nondiscrimination testing on a "benefits" basis, which is known as cross-testing. This condition does not apply if the sole purpose for converting allocation rates into benefits is to run the benefit percentages for the ABR test. In other words, if the defined contribution plan is still being tested on the basis of contributions (i.e., looking at allocation rates) for Section 401(a)(4) purposes, but the allocations are expressed as benefits to run the ABR test to support the coverage test under IRC Section 410(b) for that plan (or for any other plan maintained by the employer), the gateway condition under Section 1.401(a)(4)-8(b)(b)(1) does not have to be satisfied. The support for this interpretation is that the Treas Reg. Section 1.410(b)-5(d)(5)(1), which explains the mannser in which benefit percentages are calculated for the ABR test, does not cross-reference the gateway requirement under Treas. Reg. Section 1.401(a)(4)-8(b)(1)." Are we learning, yet?

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?

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.

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.

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

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).

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.

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

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.

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.

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."

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.

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

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?

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?