Class allocations "by name"

[SMB]

Have a dental group with 3 dentists that wants to establish a new-comparability class allocated profit sharing plan. Are there any considerations and/or adverse repercussions to defing a participant class specifically by name for each of the dentists, with a fourth class for all other eligible participants?

Thanks for any and all responses!

[dmb]

If all three dentists are key employees I don't think you have a problem. If they're not all key employees, you may want to think about assigning each of them a position and set your classes accordingly. Hope that helps.

[actuarysmith]

I don't have a cite- but I recall reading (or hearing) somewhere that if you named names, the plan could be deemed to be a CODA - since each participant could effectively choose their own contribution rate independently.

Following this logic, the participant would then be limited to contributing the 402(g) limit, rather than the full 415 limit for DC plans.

Putting that issue aside (although I would love to hear what others say about that), How about putting the three dentists into seperate groups by speciality or ownership percentage, years of service or date of birth.

Any and all of these methods would avoid specifically naming someone by name. Same results, but somehow it just smells better.

[dmb]

We have used names as classes before although we do try to avoid it if possible. As mentioned above, we have set classes based on ownership percentage, job class, officer titles. For the most part we can come up with something.

[AndyH]

Another issue with single person groups is that if someone gets no contribution that could be considered an unreasonable eligibility provision. The consequence would be that the average benefit test would be unavailable for coverage testing. The ratio percentage test must then be passed. This is clearly not a problem if the 0% group is an HCE, but a first year non-owner or someone not an HCE due to use of the top 20% can be problematic if they have their own 0% group.

The IRS took this position in a recent ALI-ABA Q&A.

[E as in ERISA]

It's also my understanding that specific "individuals" (id'd by name) can't be "classes" -- but I don't know the authority for that.

[AndyH]

katherine, yes they can. The IRS is now consistently allowing this. Their position may have been different several years ago.

[Kirk Maldonado]

I think that Katherine was right. Here is 1.410(B)-4(B):

A classification is established by the employer in accordance with this paragraph (B) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification.

[rcline46]

The IRS will not fight name classification for several reasons.

1. 401(a)(4)-11(g) amendments permit classification by name for additional allocations. (but is only good for NCEs)

2. An age-weighted plan is either a classification by age or by name, take your pick. In any event everyone is in their own rate group.

3. I don't think they could make it stand up if challenged, but they NEVER seem to change regs even when the law changes.

Reed

[Tom Poje]

but see 1.401(a)(4)-3(ii)

satisfaction of nondiscrimination classification test:A rate group satisfies the nondiscrimination classification test of 1.410(B)-4 (including the reasonable classification requirement of 1.410(B)-4(B)) if and only if the ratio percentage of the rate group is greater than or equal to the lesser of the midpoint.....

note that under a(4) there is no need 'enumeration by name' requirement. As Andy pointed out, enumeration by name could cause a plan to fail coverage, if a group of employees is allocated 0, because you have to pass 410(B) using the ratio percentage test only.

But once you get into the realm of amounts testing, class by name is not a problem for the classification test.

[Guest merlin]

I think we're crossing lines here. For purposes if coverage testing Kirk's cite is correct,but only with respect to the non-discriminatory classification test portion of the average benfit test. If you pass 410(b)by the ratio percentage test the classification -by-name issue never arises.

For purposes of allocation classes it's my understanding that anything goes:job description,name,hair color.And once you get into your rate group testing if you need to pass the ABT for a particular rate group the reasonable classification issue again doesn't arise because the rate group passes the non-discriminatory classification test as long as the ratio percentage of the rate group is equal to the lesser of the midpoint of the SHUSH corridor or the plan's ratio % as a whole.

Se Q&A 76 of the 1998 ASPA Conference,or Technical Tip 30 from Reish & Luftman.

[AndyH]

Magically well summarized.

[Guest merlin]

Does anyone have anything further with respect to actuarysmith's post? The CODA threat has been thrown around in the past in the context of partners waiving in and out of profit sharing plans,hence the "permanent and irrevocable" requirement for wauvers of participation. I've never heard of it applied to allocation classes.

[jpod]

I've had plan amendments approved where the plan, as amended, specifically says that "Dr. X" shall no longer be eligible to participate," both money purchase pension and profit sharing plans. Initially, the reviewers made noise, but I explained to them that no single doctor had the authority to get in or out of a plan, but that it was a Board of Directors decision as the entity responsible for amending the Plan. The IRS seems to accept this legalism even though everyone knows that the Board will usually accomodate each doctor's wishes, and then make it up to him or her through a larger bonus or salary allocation. However, I advise this type of client that once someone is amended out of a plan, he or she should expect to have to stay out forever.