Avg Ben % Test

[Guest Judy S]

Do the new regs on cross-tested plans requiring the gateway or broadly available or age-based allocation rates affect the average benefit test in 1.410(b)-2(b)(3)? i.e., can I calculate employee benefit percentages for the average benefit percentage test using the 1.401(a)(4)-8 regs without having to worry about the gateway?

[AndyH]

1. NO.

2. YES.

[Blinky the 3-eyed Fish]

Andy, are you sure you understood the questions because I didn't. The "i.e" there seems to me the intent was for the second question to be just the first question rephrased?

Judy, what are you trying to accomplish?

[Guest Judy S]

I have a 401(m) plan with 1000 hrs/last day requirements and a small group. The ratio % is 50%. I need to do the average benefits test for 410(b). I used "cross-testing" to calculate the employee benefit percentages for the avg ben % test. I don't think I have to worry about the gateway when I do this for 410(b)-but I'm looking for confirmation.

[Blinky the 3-eyed Fish]

You are correct, the gateway contribution is needed only to begin testing under 401(a)(4), not for coverage. You confused me by referencing 1.401(a)(4)-8 instead of 1.410(b)-5.

Andy understood you, so I think it's my issue.

[Mike Preston]

From the 2002 ASPA Annual Conference, Q&A with the IRS:

29. An employer maintains only a profit sharing plan. The contributions under the plan do not satisfy any of the gateways under the cross-testing regulations. The plan passes the average benefit percentage test on a benefits (cross-tested) basis, but not on a contributions basis. In applying the general test to the amount of contributions, may the rate groups be tested by comparing their ratio percentages to the mid-point of the safe and unsafe harbors?

Yes.

In other words, may the plan use cross testing in the average benefits percentage test, even though it may not use cross testing in the 401(a)(4) general test itself?

Yes.

[BFree]

This seems to be somewhat analgous to the above...

- Separate Match formulas

- Do not meet gateway 5%; are not gradual age or service

Avg. benefits test can use cross-testing

401(a)(4) cannot unless allocation rates are broadly available

Is the above correct?

In determining "broadly available," is 70% or the safe harbor percent used?

[Mike Preston]

What are you trying to test under a4? The "separate Match" formulas?

[BFree]

Yes, that is correct. 2 members of controlled group, each with a separate plan and separate provisions.

[AndyH]

Seems to me this has absolutely nothing to do with the gateway issues. This is either a situation where two plans pass 410(b) separately and are tested separately or they are combined and have the match components tested under benefits, rights, and features using simple head counts, nothing to do with allocation rates or equivalent benefit rates.

[BFree]

Plans cannot satisfy 410(b) separately via ratio test or ABT using contributions basis. Hence, the inquiry about ABT and cross-testing regulations.

When you say that match components are tested for BRF, are you saying that 1.401(a)(4)-2 does not apply (or is deemed to be satisfied given what I have described) and that only -4 does?

[Mike Preston]

It is unlikely that -2 applies to the match component. -4 should be your measuring stick.

[BFree]

Okay, thanks. I appreciate the replies. I see that ACP test takes care of nondiscrimination in amount of contributions.

When testing benefits, rights and features in -4, what does "satisfies 410(b) witout regard to 410(b)-5" mean?

Does it mean that you need to satisfy the ratio test or the Average Benefits Test (sans the average benefits percentage test of 1.410(b)-5). Which leaves only the classification test and the ability to go substantially lower than 70%?

Lastly, I am still unsure about whether an ABPT could be (or even needs to be)prepared on a benefits basis for the Matches of both plans. Assume 410b is not satisfied via ratio percentage and is not satisified via avg benefits test using contribution basis.

Thanks again.

[Mike Preston]

It means you can pretend that you satisfy the 70% portion of the analysis, if you ever get to the point that it would be necessary for you to satisfy that portion. The other parts of the test are still in operation. Hence, if the group of people that have a BRF meet the 70% threshold, you are done. If they don't, then you need to establish that they are a reasonable classification and that the threshold exceeds the safe-harbor (in general - there are exceptions).

You keep saying that we should assume that 410(b) is not satisfied, but without numbers I just can't imagine what you are talking about.

[BFree]

Roughly: 90 HCEs in one location; 10 in another. 1000 NHCEs; 500 in the first location and 500 in the other. Location with large amount of HCEs has greater match formula.

Okay - two plans will satisfy 410b ratio test combined - no problem.

What if the desire, because of ADP/ACP testing, was to test separately? Can we move from ratio test to average benefits (tested separately), and can avg benefits be done on a benefits basis?

[AndyH]

Sure. Everything but the kitchen sink is in the test, i.e. deferrals, matches, after tax, ps, db, esop.

[BFree]

Thanks.

I am wrong to keep thinking of the gateway provisions of cross-testing when I mention average benefits testing on a benefits basis (for Match contributions)?

I thought that if you were going to test using benefits/EBARs, you had to meet the gateway/broadly available/smoothly increasing. For instance, a Match in one plan is up to 1% and in the other is up to 5%.

[Blinky the 3-eyed Fish]

If you aren't testing nonelective contributions on a benefits basis, then you don't need to consider the gateway. Gateway is synonymous with testing nonelectives. Gatelectives. Nonelateway.

Of the notion that the gateway applies to other than nonelectives, BFree!

[Mike Preston]

Average Benefits is never "tested separately". But, yes, you can test average benefits on a cross-tested basis and, if it passes, you then can test your plans separately for 410(b) and therefore ADP/ACP.

[Guest Doug Goelz]

Just a note of caution: If an ESOP is involved, the IRS takes the position that you can not perform the AB%T on a benefits basis -- you must do it on a contributions basis. Hopefully, the IRS will change this goofy interpretation soon.

[AndyH]

Doug, I haven't heard that before. Is it in print anywhere? Is it a recent comment?

[Guest Doug Goelz]

It was addressed in the 1997 EA Meeting Gray Book (Q&A # 27), but I believe they had informally taken this position prior to this as well.

If you really want to read deep into the regs, 401(a)(4)-8(b)(1) states: ...Equivalent benefits under a defined contribution plan (other than an ESOP) ...

When the new cross-testing regs came out, there was also language in the preamble such as: A defined contribution plan (other than an ESOP) may satisfy the regulations on the basis of benefits...

[AndyH]

Thank you. That Q&A answer makes absolutely no sense to me, but clearly that is what it says. I thought I had read conflicting answers more recently so I will take a look.

Obviously there is a difference between nondiscimination and coverage but that seems to be ignored in the answer.

P.S. I cannot find anything in the ERISA Outline Book indicating that this is prohibited but I pulled out a folder I set up a couple of years ago labeled "ESOP X Testing" and right on top is Q&A 27 which could not be clearer, so I guess I did know this once but forgot it. Anyway, thanks again.