Integrated top-heavy plan, 1,000 hour/last day employment requirement, 401(a)(4); multiple formula situation because it's top-heavy?

[R. Butler]

I've got a top heavy plan. Basic 4 step integration formula. Plan has a last day/1000 hour requirement. I've got 14 NHCEs & 3 HCEs. 3 NHCEs are nonbenefitting, nonexcludable. 2 NHCEs receive top heavy only. I know that the 2 NHCEs are benefitting for coverage. In the basic integrated plan I get the pass on 401(a)(4), but since this is top heavy is this a multiple formula situation? If so I've got to pass 410(b) assuming the 2 don't benefit or I don't get the free pass on 401(a)(4); correct?

[Tom Poje]

coverage: how many NHCEs are covered as compared to HCES covered. doesn't matter how much an individual gets.

therefore, 11 / 14 = 78.57%, passes ratio percentage test, goes on the sched T.

.........

401(a)(4) - now it matters how much one gets. There is an exception to the multiple formula rule. You can treat the top heavy only people as neot benefitting.

now you have 9 / 14 = 64.28% fails ratio % but will pass safe harbor for nondiscrimination classification test.

If you can pass average benefits % test, you would be deemed to have a safe harbor formula and therefore not have to perform rate group testing.

My initial reaction would be you would want to pass using the allocation method. I believe, based on the population, if this is a non 401(k), if the plan is fully integrated at the TWB, as long as the base % < or = to 9.34% you would pass. That was a quick test on an excel sheet, imputing disparity.

If you were to test using accrual method, you have cross tested and I would think you are stuck having to provide gateway minimum. but their is a rule under broadly available rates 1.401(a)(4)-8(b)(1)(i)(B)(3)(iii) [i think I typed that correctly] - two alloaction rates can be aggregated and treated as broadly available if each group can satisfy 410(b) without regard to the avg ben % test...differences due to permitted disparity can be disregarded.

Thus it would appear you pass this and are ok.

[R. Butler]

I was afraid it would be considered multiple formulas. Now I'm somewhat lost. We handle some fairly simple cross-tested plans, but nothing 2 difficult.

1. Contribution formula is integrated at 60% of TWB. So does that mean when I do the average benefits test I adjust allocation rates for imputed disparity?

2. Assuming #1 is yes, nobody has compensation in excess of TWB, all allocation rates are greater than 5.7%. I should increase everyones allocation rate by 5.7%?

3. Plan has semiannual entry dates. Comp. prior to entry excluded. Obviously top heavy done on full year comp. When doing the average benefits test, for participants entering 7/1 can I use only comp. from 7/1-12/31.

Thanks in advance for any guidance

[Tom Poje]

mentally I can't think, especially on a Friday afternoon.

If you were to test a fully integrated plan on an allocation basis (and impute disparity) an NHCE's E-Bar would be

assuming a base % of 6%

base 6% plus 5.7% imputing disparity = 11.7%

I don't care how much the HCE makes, no matter what comp he will also end up with 11.7%.

e.g. comp = 100,000 TWB =87,000

so HCE received 6% or $6000 plus 5.7%(13000)=741 total 6741.

his e-bar is the lesser of

his C rate is 6741/ (100,000-43500)=11.93

D rate is [6741 + (5.7%*87000)]/100000 = 11.7

try any comp figure greater than the integration level. you always get 11.7%

on the other hand

at 60% of the TWB (or 52,200) he receives 4.3% (47,800) = 2055.4 extra

thus his adjusted rates would be

C rate 8055.4/(100000-43500)= 14.26

D rate 8055.4 + (5.7%*87000)]/100000 = 13.014

which is less than the NHCE of 11.7

so using a level less than 100% integration will produce a larger e-bar and thus increase the chances of failure if testing by allocation method.

so, answer to #1 is NO you don't change how you perform the test

#2 becomes a non existant question.

#3 - the regs say use 414s comp when testing. this can be from date of entry despite the fact the allocation was based on full year so you get a gift in that situation - it should help your testing.

[R. Butler]

I can't pass using allocations, so I gotta use accrual. A couple more questions.

1. I'm kinda slow, I understand the response in the last post to my question regarding imputing disparity, but I'm still lost. I guess my question was (& really still is) if the document has an integrated formula, must I impute disparity to adjust EBARs in my average benfit test. (In other words can I use 6% instead of 11.7%)

2. If I do have to impute disparity to adjust EBARs, it is my undersatnding that I now have to follow DB rules since I'm using accrual method. Is this correct? Where can I find a good explanation of how to do that? (Relius is just adding .65% to the EBAR, but I'm not going to use anything I don't understand & that I can't manually do on Excel.)

[AndyH]

You should bite the bullet and read the A, B, C, D rules of 1.401(a)(4)-7. Put it into Excel once, and it's not that bad at all. I cannot memorize it; my brain automatically rejects any requests for storage of that and the affiliated service rules, among other things.

[david rigby]

mentally I can't think...

Tom, is there any other way to think?

[Blinky the 3-eyed Fish]

I am sure a wife whose husband cheated on her would answer differently.

[Mike Preston]

The plan document formula has nothing to do with the testing under the ABT. Nothing. Whether the formula is comp-to-comp, or integrated or new comparability doesn't matter. You are free to run the ABT on the basis that you want to, whether that includes imputing permitted disparity or not.

If you impute permitted disparity, you must do so in a manner that is consistent with the test. If you are testing on contributions you would use the x% up to 5.7% rules associated with a defined contribution plan. If you are testing on benefits you would use the permitted disparity factors associated with the retirement age (testing age, actually), which in all likelihood is indeed 0.65%. But just like the DC rules, don't forget the "no more than 2 to 1" rule, so if an individual has a DB accrual rate of 0.5%, the permitted disparity factor can't be 0.65%, but instead would be limited to 0.5%.

[Tom Poje]

The Butler:

generally, it will only help your testing to impute disparity, though that is an assumption and you wouldn't have to. Quite possibly, a 'poorly' written document will list the 'assumptions' and you are stuck. Quite an oxymoron having 'required assumptions' but I have seen it.

I suppose if you had an NHCE with comp greater than the TWB or covered comp if might hurt to impute, or if you had a bunch of NHCEs with less than 5.7 (or an EBAR less than .65) you would not want to impute disparity.

pax: obviously you are not a sports fan. practically every football weekend I hear the following on Monday: "The coach couldn't have been using his brain when he thought up that play", or at least something similar.

[bevfair]

coverage: how many NHCEs are covered as compared to HCES covered. doesn't matter how much an individual gets.

therefore, 11 / 14 = 78.57%, passes ratio percentage test, goes on the sched T.

.........

401(a)(4) - now it matters how much one gets. There is an exception to the multiple formula rule. You can treat the top heavy only people as neot benefitting.

now you have 9 / 14 = 64.28% fails ratio % but will pass safe harbor for nondiscrimination classification test.

If you can pass average benefits % test, you would be deemed to have a safe harbor formula and therefore not have to perform rate group testing.

My initial reaction would be you would want to pass using the allocation method. I believe, based on the population, if this is a non 401(k), if the plan is fully integrated at the TWB, as long as the base % < or = to 9.34% you would pass. That was a quick test on an excel sheet, imputing disparity.

If you were to test using accrual method, you have cross tested and I would think you are stuck having to provide gateway minimum. but their is a rule under broadly available rates 1.401(a)(4)-8(b)(1)(i)(B)(3)(iii) [i think I typed that correctly] - two alloaction rates can be aggregated and treated as broadly available if each group can satisfy 410(b) without regard to the avg ben % test...differences due to permitted disparity can be disregarded.

Thus it would appear you pass this and are ok.

I have a similar situation to the original post. I have a Corbell non-standard 401(k) PSP. The plan uses the 3% nonelective safe harbor. Profit Sharing is integrated at 81% of the TWB, 1000 hours last day rule. The plan is top-heavy. I have 7 HCEs and all benefit. I have 7 NCHEs. 3 of which did not have 1000 hours to receive the Profit Sharing contribution. I pass 410b because I am including these 3 as benefitting for receiving the TH/SH contribution. But since they do not get a full allocation it is no longer a designed based safe harbor, testing on the allocation my 410b test is now only 57.14% My doc has the fail-safe language for 410b. So I'm thinking in order to pass the safe harbor non-discrimination I need to give one of my NHCEs a full allocation rather than just the TH/SH, making the test pass at 71%. Or do I run average benefits? If I do that I can pass on a benefits basis but not a contribution basis, does that matter? Thoughts??

[Tom Poje]

your document (well, of course the quality of document language varies) should read something like this:

410(b) ratio percentage fail-safe provisions. Notwithstanding anything in this Section to the contrary, the provisions of

this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b)

ratio percentage fail-safe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year

allocation condition or an Hours of Service (or months of service) allocation condition.

in other words, the plus side of fails safe language is that you never need a corrective amendment to fix a coverage problem. the bad news is that tehre is no option "if the plan fails either ratio percentage or avg ben pct test"

[bevfair]

your document (well, of course the quality of document language varies) should read something like this:

410(b) ratio percentage fail-safe provisions. Notwithstanding anything in this Section to the contrary, the provisions of

this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b)

ratio percentage fail-safe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year

allocation condition or an Hours of Service (or months of service) allocation condition.

in other words, the plus side of fails safe language is that you never need a corrective amendment to fix a coverage problem. the bad news is that tehre is no option "if the plan fails either ratio percentage or avg ben pct test"

That is exactly what my language says. The master document and the commentary go on to say that in order to pass 410b I bring in the minimum number of participants needed to pass the test, starting first with those that were employed on the last day of the plan year and who completed the greatest number of hours. Do I even need to do this or do I let it stand with all 7 NHCEs benefitting (including those that are TH/SH only)? Do I have the option to rate group test the allocation or is that precluded by the failsafe language? Thanks for your response.

[Tom Poje]

in your particular case I think you simply ask "How many received a non elective contribution"

remember, coverage isn't interested in "how much" but rather "How many received"

it sounds like all received a nonelective contribution, so coverage is passed at 100%.

[Mike Preston]

Tom has it right: you pass 410(b) so the 410(b) failsafe language doesn't mean anything.

Then you move to 401(a)(4). If the formula is a designed based safe harbor you pass that, too, don't you? Look at 1.401(a)(4)-2(b)(4)(iii) for comfort.