Average Benefits Test

[Guest Chris May]

I am a little new to this, so any help would be appreciated. I am in a disagreement with how the average benefits test on a new comp 401k was calculated in prior years. My understanding is that you add all contributions and divide by compensation. The NHCE's should average 70% of the HCE average. Is this correct?

A prior TPA firm calculates the average based on the ebars divided by compensation, producing a very low average. The advisory firm wants to know why we are not performing the calculation like the prior TPA firm. I think this is incorrect.

Please let me know what you think.

One More thing: Please confirm my understanding that for a plan that excludes comp prior to plan entry I would need to use the full plan years compensation for testing, correct? The gateway rules require a 5% on a full years compensation (in situations where HCE's receiva a 15% accrual).

Thank you

[Tom Poje]

avg ben % test - you would add all the contributions and forfeitures and divide by comp if using allocation method.

you would add all contr and forfs and convert to a benefit and divide by comp if using the accrual method.

This is per individual, so each person has his or her E-Bar that is then averaged

comp can be from date of participation, and the 5% gateway is satisfied if based on date of participation.

if plan is top heavy, the participant would have to get at least 3% of total comp

[Blinky the 3-eyed Fish]

One side note is that compensation from date of plan entry can be used in testing regardless of how the plan contribution is allocated unless there is something in the document contrary to this. This is because compensation from date of plan entry satisfies a 414(s) definition of compensation.