Smooth Method in Creating Rate Groups

[Guest TracyAndrews]

Could someone provide a little extra clarification of what is expected when creating rate classes after 12/31/01? At the IRS conference last week in White Plains Jim Holland suggested that rate groups must be within 5 percentage points of each other in terms of allocation rates. Therefore even if you passed the Gateway Test, and your participation and coverage tests, if the rate classes exceed eachother by more than 5%, i.e. Staff 5%, Principals 15%, that would not be acceptable. Am I undertanding this right???

[AndyH]

No, that is certainly not my understanding. Under the proposed regs, there are three acceptable approaches,

1. all eligible NHCEs get at least 5%

2. all eligible NHCE get at least 1/3 the allocation rate (contribution plus related forfeitures divided by pay) of the highest HCE

OR

3. Allocation rates are "Broadly available" and "increase smoothly" at "regular intervals".

I believe the 5% relates to the definition of the third option only.

For example, allocation rates of 3% for one group, 9% for another group, and 12% for a third group are no good because 9%-3% exceeds 5%.

Did Holland indicate when final regulations would be issued?

[Tom Poje]

assuming the plan is not providing the minimum gateway of 1/3 of the HCE (up to 5% cap), but rather providing a smoothly increasing rate group, the rules say 2* or 5%.

in other words

you could not have 3% for age 25-34, 8% 35-44, 13% for 45-54, etc.

This is because the first age range, while meeting the 5% range, fails the 2 times test. In other words you would have to have the following:

Ratio of allocation rate to previous band

< age 25 3% N/A

25-34 6% 2.00 (6/3)

35-44 9% 1.50 (9/6)

45-54 12% 1.33 (12/9)

55-64 16% 1.33 (16/12)

65- 21% 1.31 (21/16)

(There is also a ratio of allocation rates as well)

as long as the ratio is < or = to previous one you are okay.

In other words, if all employees were less than age 25, and the owner was age 55-64, then your allocation could be:

3% to the NHCEs and 16% to the HCEs. (Note this is not 1/3 of what the HCE received. of course, then you still have to pass nondiscrim testing.)

[Fred Payne]

Per AndyH's listing of the Gateway's, is it the GREATER of, or LESSER of, 1/3 of the highest HCE allocation rate or 5% in the instance when there are two Allocation Groups and the HCE gets 21%. Does the other group get 7% or 5%?

[AndyH]

5% would pass. If an HCE got 12%, 4% would pass, so I guess it's the lesser of.