Definitely determinable benefits

[Guest John Nelson]

Consider an employer that has only HCEs. What is the general consensus "out there" about defining in the plan document each participant to be his/her own individual rate group. It's certainly permissible under the IRS Field Directive for a rate group to have only one participant. I will appreciate your thoughts. Thanks.

[AndyH]

I think the consensus is that it can be done, but has risks and burdens that make it less than advisable.

One issue is a possible impact on coverage. If an allocation group receives 0%, is that different than excluding that person by name? That would then raise the question as to whether the eligibility criteria is reasonable. If not, the average benefits percentage test may be unavailable for coverage testing.

Some would also question whether the plan could be considered at least in part a CODA.

Third issue is just practicality, communication, and efficiency.

But, having said all of this, it can be done and I have seen a few of these animals.

p.s. Each of these issues is minimized with a group of only HCEs, however.

[Mike Preston]

I'm from the camp that says the flexibility gained from the approach far outweighs the disadvantages. The non-discrimination testing is certainly no worse than it would have been had the plan been amended to provide the specific allocation or groupings necessary to implement whatever the plan sponsor chooses. I don't see how the IRS could have possibly approved the use of groups being pre-defined with one participant per group if that would give rise to a claim of being subject to the rules of 401(k). As to the third one, while communication is different, it seems to me to be easier than in the case of a plan that is amended to accomplish different allocation methodologies in different plan years.

Andy, are you aware of any citation from the IRS on the CODA issue?

[AndyH]

No, I've heard and read a number of people raise it as a possible issue, but not the IRS (yet at least). Since they lost the new comparability war, I get the feeling they're hoping for Bush's proposal to wipe out everything but IRAs and (for now) DB plans.

Many of these one person allocation groups are set up on behalf of physicians who effectively control the decision of what goes to whom, so the CODA line of reasoning works for me. In fact I don't see a difference for an owner-employee.

I happen to work in a relatively high volume atmosphere with clients, contacts, and even employees geographically dispersed, so lower maintenance and low risk are more important to me than they might be elsewhere.