more help on classifications

[Guest ANNEBV]

regarding the "reasonable classification" test, do all classifications have to be "reasonable" as they relate to one another or just plain "reasonable?"

for example, can i have the following classes:

1). majority owners & spouses

2). minority owners & spouses

3). associate dentists

4). full time staff

5). part time staff

these are all "reasonable" classifications, as a matter of the business' practice, but they are not, obviously, all consistent with each other. So my question is, do i have coordinate the classifications? for example, if i have "majority owners & spouses" does my other category have to be "non-majority owners & spouses" so that the classes are consistently coordinated?

this is probably a stupid question but i just want to make sure i properly understand the application of "reasonable classification" among the entire group.

appreciate ANY help that anyone can give!

[Blinky the 3-eyed Fish]

I assume that this question is referring to the allocation groups within a cross-tested profit sharing plan. That being said, the requirement that the classifications be reasonable does not apply. It applies for performing the average benefits test for coverage.

[AndyH]

I agree with Blinky, but there may be some confusion resulting from the ANNEVB's earlier thread, because Tom didn't seem to agree on that one, at least that was my take. Blinky, it might be helpful if you looked at both and commented. Here is the first thread:

http://benefitslink.com/boards/index.php?showtopic=17267

[Blinky the 3-eyed Fish]

Here is a quote from Tom's post:

"however, for purposes of cross testing, 1.401(a)(4)-2©(3(ii) clearly states that to pass the classification test you only have to pass the midpoint test among the rate groups. The reasonable classification is deemed to pass."

Andy, it seems he agrees to me.

[AndyH]

Blinky, I see your point but that's not the issue I'm trying to get at. I think that what is causing some confusion is:

Does the use of allocation classes which are not "reasonable", in a plan which has a "reasonable" class of people covered (e.g. 21 and 1 YOS) prevent the use of the average benefits test for coverage purposes?

I think the answer is NO, that classifications for allocation purposes have no effect on coverage testing, with one exception.

The exception is that if one class (a named person for example) receives 0% or $0, then that has the same effect as if the person was excluded from the plan by name, which would be an unreasonable class for eligibility purposes. And an unreasonable eligibility provision prevents the use of average benefits for coverage testing.

[Blinky the 3-eyed Fish]

Andy, I see now what you are saying and I agree with you.

[Guest merlin]

And if you can't use the abt to pass coverage that would require that all of your rate groups pass the rpt,right?

[AndyH]

No, Merlin. The plan as a whole would need to pass R/P for coverage purposes. But then you still need to do (a)(4) testing if allocations do not meet the safe harbor rules, and the rate groups need not all be 70%. There is a "free pass" into the ABPT for purposes of rate group testing under the general test provided that each group exceeds the mid point.

So the "reasonable" requirement applies only to testing the plan as a whole, and whether or not the Average Benefits test is allowed for coverage testing, at least that is how I understand it.

And, thanks, Blinky.

[Guest merlin]

Confusion reigns, Andy. Or maybe I'm reading too much into your earlier post. In order to satisfy the modified abt for the rate groups: 1. my rate group's coverage ratio must equal or exceed the midpoint of the SHUSH corridor (reasonable clasification is not an issue); 2. my rate group must pass the ab% test,which is deemed to pass if my plan as a whole passes the ab% test. Now for the confusion.If I can't use the ab test (which consists of the classification test and the ab% test) to pass coverage because I have an unreasonable classification,doesn't that negate the use of the ab% test in the rate group testing? Or am I permitted to look at the ab% test in a vacuum,solely for purposes of the rate group testing even if it isn't allowed as part of the coverage test?

[AndyH]

Merlin, I think your last sentence is right, but let's back up a step.

What are you testing for?

Situation #1. Safe harbor plan but eligibility is defined as all employees with red hair. The test is coverage only. Because eligibility is not reasonable, Average benefits is not available. Must pass R/P. If R/P passes, done.

Situation #2.

Eligibility is 21/1 Year of Service. You can use either R/P or Average Benefits for Coverage Testing, regardless of what the allocations are.

2A

If in #2 allocations are uniform, pro-rata, safe harbor, you are done.

2B

If in #2, allocations are to classes that have definitions that do not satisfy the reasonable criteria, you must do rate group testing for 401(a)(4), which is comprised of the NCT (but you get a free pass by the reasonable requirement since it is rate group testing), so the rate groups must satisfy the mid point and the allocations in total must pass the 70% ABPT.

2C

If in #2, allocations are to classes that are reasonable. Testing is exactly identical to 2B, as I see it.

[Guest merlin]

Confusion reigns, Andy. It's not the reasonable classification issue that bothers me,it's the average benefit % test. Or maybe I'm reading too much into your earlier post. In order to satisfy the modified abt for the rate groups: 1. my rate group's coverage ratio must equal or exceed the midpoint of the SHUSH corridor (as you point out, reasonable classification is not an issue); 2. my rate group must pass the ab% test,which is deemed to pass if my plan as a whole passes the ab% test. Now for the confusion.If I can't use the ab test (which consists of the classification test and the ab% test) to pass coverage because I have an unreasonable classification,doesn't that negate the use of the ab% test in the rate group testing? Or am I permitted to look at the ab% test in a vacuum,solely for purposes of the rate group testing even if it isn't allowed as part of the coverage test?

[Guest merlin]

Andy, I agree with you. The ab% test is applied to the rate groups without regard to the coverage test.I had always linked them together,but after reading your poast and the Gospel according to Sal,I think they should be separate,just like the nct. Thank you.