Citation on Quote

[jquazza]

Mike Preston said:

But there is one other issue to be aware of. If a new comp plan has any classes where individuals otherwise eligible for a contribution end up with none, then the IRS has stated, and I concur, that the net effect is that the plan can not use the Average Benefit Test. This means very little if the plan meets the 70% threshold. However, if it doesn't, then there will need to be additional NHCE's that benefit. This will happen most frequently when there are terminated NHCE's with hours in excess of 500.

Mike,

do you have a citation to back this up?

[Blinky the 3-eyed Fish]

If your coverage ratio dips below 70%, then you cannot satisfy the ratio percentage test, but must rely on the average benefits test. The first part of that test is the nondisriminatory classification test. 1.410(b)-4(b) states that the classifications have to be reasonable under a facts and circumstances test, but specifically states that naming individuals in not a reasonable criteria.

By having people in their own rate group and choosing to give $0 to some participants you are effectively excluding them from benefiting by name. Thus, as Mike correctly points out, passing the average benefits test is not an option.

[AndyH]

It was in a 2001 Q&A session by the ABA's Joint Committee on Employee Benefits. It was in Benefits LInk's newsletter. I had a link to it but it has changed. A search of the ABA website might locate it.

[jquazza]

Taking the issue of reasonable classification aside, let's say your classification is reasonable (e.g. Attorneys who are not partners) and the employer decides not to contribute any money for that group this year, are you saying that I cannot use the ABT to demonstrate coverage and nondiscrimination?

[Blinky the 3-eyed Fish]

No, not at all. I guess I was not being clear. The whole issue is that the ABT has 2 parts, and one of those parts is the reasonable classification test. If you actually have reasonable classifications, then by all means you can use that test to pass coverage.

[AndyH]

But if the individuals that get $0 happen to be 3 eyed fish, that might not be reasonable, based upon objective business criteria, so the ABPT would not be available, the theory goes.

[jquazza]

Whewwf. You had me worried for a moment. So if I understand your issue correctly, you wouldn't consider an individual as benefiting for the reasonable classification test if his/her contribution rate was 0 even though he /she met the accrual requirements for the contribution. In which case I concur.

[Blinky the 3-eyed Fish]

No, to be blunt I am afraid you don't understand my point because you appear not to understand the reasonable classification test. Read 1.410(b)-4(b) and see if that helps. I am afraid I can explain no more.

[jquazza]

Blinky, I really meant nondiscriminatory classification test in my previous reply, not reasonable classification. My mistake.

[Blinky the 3-eyed Fish]

Yes, I understood what you meant and answered accordingly.

[AndyH]

ok, my last stab at this.

The IRS said in a Q&A (and maybe elsewhere, but I haven't heard it) that providing an individual that is in his/her own class a discretionary class allocation of $0 has the same effect as excluding the person by name, which has the same effect as an eligibility requirement that does not meet the reasonable standard of the NCT test. Therefore, one may not proceed to use the ABT because a reasonable standard is a prerequisite.