Rate group testing

[FAPInJax]

A question has arisen regarding the following:

A HCE is NOT benefitting under the plan (for some reason).

A second HCE is benefitting under the plan BUT has a zero accrual rate (for some reason).

Are rate groups required for BOTH HCEs???

IF so, what accrual rate is used for the first HCE?? (Zero is not correct because he actually has none)

The reason for the question appears to be a difference in the testing under 410b for the plan versus for the rate group (the rules are slightly different).

Thanks, in advance, for any input provided.

[jaemmons]

Only employees who are eligible for the tested contribution source, are to be counted in the 401(a)(4) testing. Therefore, if an employee has met the plans eligibility requirements to enter the profit sharing piece of the plan but does not meet the allocation requirements (i.e.-last day, 1000 hours, etc.), he/she counts as a "0" EBAR for you (a)(4) test. Remember that benefiting applies to each money type individually. Therefore, if a participant is deferring but not eligible for the ER profit sharing, they have a benefit accrual rate for the ABT but have a "0" EBAR for the 401(a)(4) test, assuming that they cannot be statutorily excluded (age 21 , 1 yos)

After you have determined the employees to be included in your test, a rate group is created for every HCE. If more than one HCE have the same EBAR, you can lump them into one group.

Keep in mind that an accrual rate or EBAR is based upon the employee receiving an allocation of the contribution which is being tested (i.e- profit sharing for cross tested/age-weighted plan). No contribution mean a "0" EBAR.

[Guest David M. Lipkin]

Doesn't 401a4-12 define "Employee" as someone who is benefitting under 401b?

Therefore, doesn't this imply that someone who is not benefitting is not a part of the 401a4 test, rather than showing as a 0?

David

[Tom Poje]

If that was true, then the 401(a)(4) test would consist of only those benefitting, therefore the % would always be 100%, therefore the plan would always pass.

see 1.401(a)(4)-2©(2)(vi)(3)

"...thus, for example,the ratio percentage of the rate group is determined by taking into account all nonexcludable employees regardless of whether they benefit under the plan"

as for an employee treated as benefitting with a 0 accrual, in both the DB world and DC world easily possible due to 415 limits or plan limits, floor offsets, etc.

see 1.410(B)-3 for the examples

[Guest David M. Lipkin]

A test that shows everyone benefitting would show 100% for 410b.

If HCE contributions are higher than those for NHCE's, the 401a4 test would not necessarily pass. Am I missing something?

David

[Tom Poje]

first, yes, I mispoke my first statement. certainly the HCE could receive more than an NHCE and the plan fail testing. my apologies. never type in a hurry.

what I was really addressing was your statement

'someone who is not benefitting is not a part of the 401a4 test, rather than showing as a 0'

someone who is otherwise eligible but not benefitting shows as a 0 for the 401a4 test. such ees are the main reason a plan can fail avg. ben % test.

The only exception would be if the person was not eligible for the plan (e.g. failed age and service). but that was not being addressed in this question.

[Guest David M. Lipkin]

I understand now.

Thanks, Tom!

David