Average Benefit Test with different eligilibilities

[Guest Roman]

If a PS Plan has a 21 & 1 eligibility but with a 401(k) feature eligibility of any and any, in doing the average benefit test of the cross-testing, do you include those participants eligible for the 401(k) but not yet eligible for the PS? If yes, please include citations. Thanks.

Roman

[Mike Preston]

It depends. If you are testing on the basis of those who are statutorily eligible and those who are not statutorily eligible you would not include those that are eligible only for the k plan. However, if you are not testing separately under 410(b) then your average benefits test must similarly not be separated.

The basic rule is from the definition of a plan in 1.410(b)-7.

The IRS got this one wrong at the 2001 ASPA Annual Conference where they said that there is always precisely one ABT. Then they reversed themselves and got it right at the 2002 Enrolled Actuaries meeting.

Q&A From 2001 ASPA:

1. Plan has immediate entry in 401(k) and 21/1 for profit sharing allocation. When running the average benefits percentage test for purpose of the general test how are employees with less than a year handled – i.e are they in the ABPT?

A: Yes, they are in the ABPT.

Does it matter if we have bifurcated for ADP testing or not?

A: No, not for the ABPT.

Q&A From 2002 EA Meeting:

QUESTION 43

Other DC Issues: Treatment of Different Eligibility Requirements in Average Benefits Percentage Test

A plan allows immediate entry for purposes of making 401(k) deferrals but imposes one-year service and minimum age 21 eligibility requirements for participation in the plan’s profit sharing allocation.

a) Are employees who have not completed the age 21 and one-year service requirement included in the average benefits percentage test (ABPT) for the profit sharing component plan?

b) Is the response the same if the 401(k) component plan is disaggregated into two components using the otherwise excludable employee rule?

RESPONSE

a) Yes, they are in the ABPT.

b) No, in that case, the “otherwise excludable employees” component plan is a “mandatorily disaggregated” component plan that cannot be included in the ABPT testing group. Reg. 1.410(b)-7(e) calls for the aggregation of the “plan being tested and all other plans of the employer that could be permissively aggregated with that plan”. The regulation indicates that this is determined by applying paragraph (d)(2) [Rules of disaggregation] of this section without regard to paragraphs ©(1) [401(k) and 401(m) mandatory disaggregation] and ©(2) [ESOP mandatory disaggregation] of this section. Thus, the disaggregation rules do not allow mandatorily disaggregated plans, other than 401(k), 401(m) and ESOP component plans, to be included in the ABPT for other classes of plans.

If you want chapter and verse there is a really, really long post of mine somewhere on here that goes into all the citations one could ask for. I think.

Maybe somebody else actually knows where it is!

[AndyH]

Mike, just to clarify, are you saying that the ASPA Q&A response was wrong, or do you instead mean to suggest that it was not complete because it did not suggest the option of separately testing statutorily excludable employees?

Would you clarify which part you disagree with? Thanks.

[Mike Preston]

SIx of one, half a dozen of the other.

I suppose, if one was being charitable, one could say that the ASPA Q&A was merely silent on the issue as intended.