Safe Harbor vs. Midpoint

[Fred Payne]

In the current issue of the PPD ERISA NEWSLETTER devoted to cross-testing, an example is given inwhich the allocation fails the Ratio Percentage Test but passes the Average Benefits Test. It notes that the rate group tested satisfies the nondiscriminatory classification test because the NHCE benefitting ratio "at least equals the safe harbor percentage."

Given the NHCE concentration ratio in the example, PPD used the safe harbor percentage, not the midpoint. In the ERISA Outline Book, Tripodi states that the coverage ratio "must be at least equal to the midpoint between the applicable safe harbor percentage and the unsafe harbor percentage..."

I've always used the midpoint, but PPD's comment gives me caution. Can anyone explain the difference in the statements?

[Tom Poje]

I think all it is simply saying is that based on the facts, without going any further, we know the plan passes safe harbor, so it for sure passes the midpoint.

for example, if I have 2 NHCEs and I know my HCE is less than 1 of them, I know for sure I pass any safe harbor, since safe harbor is at most 50%. i dont have to worry about looking up the midpoint.

[Fred Payne]

That's certainly a logical explanation, Tom. I infer from your answer then that it is really the midpoint that is the threshold for passing the test.

Thanks.

[AndyH]

Tom's explanation is most likely true, but it seem pretty strange that anybody knowledgeable in this business would reference the safe harbor percentage in the cross test context. It sounds like the person didn't know the basic rules, and may have been correct only by accident.

Did the author seem to be knowledgeable? I'm not familiar with the publication.

P.S. Fred, the target is technically the lesser of mid-point or the plan's ratio percentage, which is usually the mid-point.

[Guest Bandb]

The Classification test of 410b-4 makes no reference to the midpoint. The rate group Classification test in 401a4 does use the midpoint. Could the PPD Newsletter have been referring to 410b without use of 401a4?

If so, there may be justification for omitting a reference to the midpoint (which, granted, is essential for optimizing a cross-tested situation).