Benefit Formulas

[Guest DRN]

A new client currently has (1) physicians getting formula A and (2) non-physicians getting formula B - and all the appropriate non-discrimination tests are performed annually.

Question 1: Does anyone see a problem with amending to (1) physicians get A (2) non-physicians except John Doe get B and (3) John Doe gets C

and

Question 2: More generally can you have plan covering 3 NHCE's which has formula A for Mary Smith , B for Joe Jones , and C for John Doe ??

[Blinky the 3-eyed Fish]

Question 1: No problem that I see

Question 2: Our DC document has approved language that allows everyone to be in their own rate group. I don't use it because of these outstanding issues. 1 - it could be a deemed CODA; 2 - you must pass 410(b) on the ratio test; 3 - most importantly, I think it goes against the spirit of the law and is overly aggressive.

In your situation with a DB plan, 1 is not a concern; 2 is a must; and 3 is up to you. I think in a DB plan 3 is not as big of an issue than in a DC plan where contributions are discretionary each year. Also, with 3 NHCE's that in my mind adds more to it being acceptable.

[Mike Preston]

I am not in agreement with Blinky on his opinion as to the acceptability of individuals being in their own groups. If the IRS thought it was a problem, they would have said so before approving it for use in so many _pre-approved_ documents.

With that said, I also disagree that 2 is a "must". The only way one is forced into the ratio test for 410(b) is if you are including in the allocation/benefit provisions a group that does not satisfy the reasonable classification test. That may or may not happen. It is much more likely in a DC plan where the exclusion is potential in each year. In a DB plan with multiple formulas, unless one of the formulas was "zero", it just doesn't apply.

[AndyH]

Mega-dittos to Mike's comments.

[Blinky the 3-eyed Fish]

I wasn't too clear on my "2 is a must" comment. I actually meant that since the plan had only NHCE's, it was an automatic pass.

Mike and Andy, are both of you setting up DC plans with people each in their own allocation group? If yes, are there accrual requirements for the nonelective contribution?

[AndyH]

Blinky, we have set some up with one participant per group and also taken some over, but I discourage this design.

I ran across a ALI-ABA/IRS Q&A a couple of months ago that basically says that an argument can be made that a one person group who receives 0 has the same effect as excluding the person in that group by name, which is not a reasonable classification for 410(b) purposes. This, as the argument goes, makes the average benefits percentage test unavailable for coverage testing purposes. This is not normally a problem because the 0 is usually an HCE but a circumstance can arise (assume a new doctor for example) where that person could be an NHCE in the first year with potential problems resulting. This plus the potential for a CODA argument makes me leary of this.

And another problem is communication, both client/employees and TPA/client. We've seen classes by dates of birth, e.g. physicians born on ______. Strange but true.

But, having said that, we will permit this in very limited circumstances. And we take over a lot of plans with one person groups.

I attended an ASPA session a couple of years ago when a Milliman actuary (well known but his name escapes me at the moment) says he once designed a plan for 300 employees with each employee in his/her own group, and he said it is perfectly acceptable. But he said it was administratively impractical and would never do it again!

[Blinky the 3-eyed Fish]

With your mega-dittos, I presumed you encouraged that design. I was going to knock you down a couple of rungs on the Benefitslink golden ladder, but now I will keep you up there high on your perch.

I agree with your second paragraph.

Me no communicate well dis time of year. Too many sole proprietors want to file their taxes on time.

[AndyH]

Understood.

We both know that you aren't exactly going out on a limb agreeing with Mike!

And I did think that you and I understood these rules the same, so we'll blame the Schedule C'ers.