Excluding HC's in the general test

[Guest dietpepsi]

I was wondering if anybody is familiar with, or uses in real life 1.401(a)(4)-3©(3).

This is what it says.

(3) Certain violations disregarded. A plan is deemed to satisfy paragraph ©(1) of this section if the plan would satisfy that paragraph by treating as not benefiting no more than five percent of the HCEs in the plan, and the Commissioner determines that, on the basis of all of the relevant facts and circumstances, the plan does not discriminate with respect to the amount of employer-provided benefits. For this purpose, five percent of the number of HCEs may be determined by rounding to the nearest whole number (e.g., 1.4 rounds to 1 and 1.5 rounds to 2). Among the relevant factors that the Commissioner may consider in making this determination are--

(i) The extent to which the plan has failed the test in paragraph ©(1) of this section;

(ii) The extent to which the failure is for reasons other than the design of the plan;

(iii) Whether the HCEs causing the failure are five-percent owners or are among the highest paid nonexcludable employees;

(iv) Whether the failure is attributable to an event that is not expected to recur (e.g., a plant closing); and

(v) The extent to which the failure is attributable to benefits accrued under a prior benefit structure or to benefits accrued when a participant was not a HCE.

Anybody ever used this in testing?

Thanks

[Tom Poje]

I've heard of it, never used it. interestingly enough, no such corresponding rule exists exists for DC plans. (Therefore I would shy away from it if you are talking about a DC plan that is cross tested) The example provided in the regs uses a situation in which the plan fails because the most valuable accrual rate of one HCE fails.

Therefore, I would be wary about using this option - again the facts and circumstances would be the deciding factor.

[david rigby]

As Tom states, "facts and circumstances" is the point. The reg. cite is a type of "safety valve" that the IRS built in to allow for circumstances that could not be anticipated in the writing of the regulations.