ABT-Safe Harbor 401(k)

[Guest William Lehman]

Using a Safe Harbor NC allocation that shows dispartity between the NHCE and HCE, do you need to pass ABT on the allocation of that contribution only? Can it fail, but pass the ABT General Test(which includes all contributions)?

I do realize it will need to pass the rate group test. If it does that and fails, does it matter?

[AndyH]

Half the solution is identifying the question. Could you clarify please. How can a safe harbor nonelective contribution have disparity between NHCEs and HCEs, unless of course HCEs do not get the contribution, in which case, what is being tested?

Sorry, but your last two sentences don't make sense to me.

Maybe the question is: If the rate group test is passed, do you need to do average benefits? If that is the question, the answer is yes unless all of your rate groups are at least 70%. And if you must do average benefits and you fail, you fail the entire 401(a)(4) general test.

[Guest William Lehman]

Sorry, I didn't mean "disparity" as in integration. I meant just a significant diffence in allocations to NHCE vs HCE(5% vs 10% for example).

Now, when you say you need to do average benefits do you mean all contributions(deferral, match, sh, nc alloc)?

My question was if the rate groups pass(nc alloc only) on the contribuiton, do you need to do a average benefits on the nc allocation only?

[AndyH]

Each of your rate groups must pass coverage, either by ratio percentage (70%+) or Average benefits. The rate group test would included only employer non-elective, generally speaking, but this would include a 3% SHNEC as well.

If any of your NC rate groups are under 70%, you must proceed to average benefits, and in that test you include all contributions that could be permissively aggregated, plus k, m, and esop allocations.

[Tom Poje]

ugh. I hate it when people use the term 'average benefits' without specifying exactly what is meant.

It is like using the term 'excluded' or 'excludable'

at that point you need to know whether you mean from voverage or the plan. It makes a big difference.

There is an average benefits test.

It consists of two parts:

1. Nondiscrimination classification test

2. average benefits percentage test.

note how the term average benefits crops back up.

In the average benefits percentage test you count ALL contributions.

in the nondiscrim classification test (which is part of the average benedits test) you only count the nonelective contributions (e.g. profit sharing, forfeitures, db, etc)

watch out if ESOPs are involved. special rules apply.

[Fred Payne]

Tom:

Here's a question related to the ABT. Let's say I have a Safe Harbor 401(k) Cross-Tested Plan that includes a last day of the year employment requirement for Allocation purposes. Participant A termed in August and is not entitled to a Profit Sharing contribution but since he did defer into the 401(k) while employed, he gets the 3% SHNEC.

Particpant A is not included in coverage when conducting the Ratio Percentage Test. Let's say it fails. Now I have to pass the ABT, the first part of which is the Non- Discrimination Classification Test for each Rate Group.

Question #1: Does Participant A get included in either Part 1 or Part 2 of the ABT test as you have outlined it?

Question #2: If the Plan had passed the Ratio Percentage Test, is it correct that my only administrative test is to make sure that Participant A received his 3& SHNEC?

Thanks as always for your expertise.

[Tom Poje]

let's see if my reasoning makes any sense.

and let's look at it from a different point of view to start with.

(I know, never end a sentence with a preposition)...

to start with, lets look at it from a different point of view. the 401(m) test

I have a plan with a match, only to those active or 1000 hours.

Participant A terminates and is therefore not entitled to a match.

If he terminated with less than 500 hours, you would (probably) treat him as excluded for coverage purposes.

If he terminated with more than 500 hours you would treat him as includable and not benefiting.

In either case, not on the ACP test.

Now, what if the plan allowed for after tax contributions? You would treat him as included and benefiting for coverage (and also in the ACP test) even though he didn't make an after tax contribution.

ok, now lets look at the nonelective test for coverage. By the way, for purposes of this q/a I like that term - its what you call it according to the 5500 instructions.

This individual received a SHNEC. Is that a nonelective contribution? Yes, of course, I simply write SHNEC cuz I hate writing out the whole term. so, when you say participant A is not included in coverage, I am not sure I agree. He received a nonelective, he is includable and not benefitting. (Sort of like the after tax concept - it tosses you into the test no matter what)

In fact, your earlier statement

"since he did defer into the 401(k) while employed, he gets the 3% SHNEC" is not correct either. Regardless of whether he defers or not he is entitled to the SHNEC. Otherwise, what you have is a SHMAC and this question would be answered differently. (But since you indicated it was 3% we know that can't be the case.)

Now, once the person receives any type of nonelective, they must be bumbed up to the gateway minimum. ASPA's webcast Q and A (8/1/2001) would support this. it was the 8th question, I believe that webcast was posted in an earlier question in this forum. heck, I have a copy that I printed off from somewhere.

Regardless of whether the person deferred, received a SHNEC or not, since he could have deferred he would be included in the average benefits % test. If there was no SHNEC, and he terminated with less than 500 hours, then you have the option of including or excluding him from rate group testing, but he would still be in the average benefits percentage test.

you did not indicate if this person was 'otherwise excludable'. the answer would change a bit if that was the case - but then why would you even give him the 3% SHNEC.

..........

Fred - I use your spreadsheet all the time. it is really helpful. save me a lot of time.