Employment Status as a Reasonable Classification

[Guest merlin]

In the 2001 ASPA Q&A the IRS opined that "Participants not employed at the end of the Plan Year" was not a reasonable classification for purposes of the ABT. Has anyone heard anything more on this topic?

[AndyH]

No, but I heard that as well and have accepted it.

[Guest merlin]

That's pretty stiff. It severely curtails the ability of smaller plans to use the abt, since most of the nonbenefiting nonexcludables are the one not employed on the last day. Any idea of the rationale behind the interpretation?

[AndyH]

Merlin, I do remember the question and answer but not the context. I just looked at Sal Tripodi's 2002 Cross tested sample language outline and he in facts suggests such a group as "participants who do not meet the allocation requirements of section ____". I don't know if this was written before or after the Q&A that your referenced, probably before.

But the ABPT is not necessarily an issue anyway. Only in the case where a class that does not meet the reasonable standard gets $0 and others get something is the ABPT an issue.

If terminees are their own class and they get 3% there is no issue. Why not simply condition the allocation on last day employment for everyone in all classes. Doesn't one of these options work?

The ABPT is not precluded just because there is a class that is not reasonable; just when such unreasonable class gets nothing is this an issue.

[Guest merlin]

Andy,

As I read the question it was asked in reference to coverage, not allocation classes and nondiscrimination. It's at Reish & Luftman Technical Tip #92. Take a look and tell me what you think.

[AndyH]

Well, with all due respect to the firm, I think that there are two issues being confused by the question and the answer does nothing to clarify things.

There is nothing technically stated incorrectly.

But my opinion is that the entire question and commentary suggests an incorrect conclusion.

The people who benefit under the plan must be determined based upon reasonable eligibility standards or the ABPT is unavailable. But within the plan, allocations can differ among different groups that do not have to meet the same reasonable standard.

For example, a plan covering only John Doe would be a plan that does not have a reasonable standard for determining eligiblity. It better pass the ratio/percentage test because the ABPT is not available.

But a plan that covers all employees and has two groups, one consisting of John Doe and the other consisting of all other employees does have a reasonable eligibility standard but does not have groups that satisfy the reasonable standard. If, however, all employees benefit, even at different levels, all employees benefit under the plan and therefore the ABPT is available.

Consider the same plan with the same two groups, but John Doe gets a contribution but group #2 gets $0. This has the same effect as excluding from participation all employees other than John Doe, an unreasonable eligibility standard. The ABPT is unavailable.

[Guest merlin]

One more question. Is this position published anywhere except in the 2001 Q&As? Audit guidelines maybe? If not, then it's just informal guidance, subject to the usual disclaimers on such. Just last year at the NE Area Benefits Conference I asked Jim Holland if you had to treat otherwise excludables in a 401k plan consistently for purposes of testing on the k, m, and nec, and he answered "Yes". Admittedly, this was in a hallway between sessions, and he was on his way out to catch a plane, so he didn't have time to give it much thought, but his answer was clearly wrong, as has been agreed to on these boards. Maybe the Setvice is wrong on this one too?

[AndyH]

Merlin, I took a look at the EOB and oddly enough it cites an ALI-ABA Q&A (which I know I read) instead of the ASPA Q&A on the same issue and it is much clearer than the "Technical Tip", so reading that might help you accept my point. It addresses the availability of the ABPT, not the last day issue, however.

It was under Reasonable Classification in the 2004 Edition. It might be in 2002 or 2003 as well for all I know.

But it does not definitively answer your question about last day and reasonable classification. I just think you'd be on real thin ice because there is room for excessive employer discretion. Go for an FDL if possible; otherwise I would not take the risk.

[Guest merlin]

Andy, we haven't gotten our 2004 EOB yet. The 2003 refers to a question in 2001 posed by the ABA Committe on Employee Benefits regarding naming employees by allocation group, and then giving them a 0 allocation. Is that what you're referring to?

I don't understand your comment about "excessive employer discretion". The guy is either there on the last day or he's not. He entered the plan under a reasonable classification. He terminated employment. The plan says he's not eligible for a contribution because of the last day requirement. If he was credited with 501 HOS srvice he's nonexcludable for 410b, so he counts for testing as a 0. Everything is prescribed. Where's the discretion?

[Blinky the 3-eyed Fish]

Are you two on the same page?

Merlin, what are the allocation conditions in the plan? What are the allocation groups in the plan?

[Archimage]

Interesting discussion. Would the ABPT still be available if a group of HCEs got a zero contribution? (assume this would not make the plan a CODA).

[AndyH]

Blinky, thanks. I think we need your mediation. I think you and I see this the same way, so HELP please!

[Guest merlin]

A ps plan covers 3 NHCE and 1 HCE. The allocation basis is a safe harbor, and requires 1000 hours/last day to get an allocation. One NHCE terms after 1000 hours but before last day. Coverage ratio = 67%. Can I use the abt to pass 410b? That's all. The IRS answer from the 01 ASPA conference inclines toward no, but I'm looking for something more definitive. That's all.

[AndyH]

Absolutely.

Both Q&As were addressing a different issue, one in which the plan has two allocation groups, those employed on 12/31 and those not employed 12/31. And the employer, by discretion, chose to give one group a contribution and the other no contribution. The IRS was saying that under this scenario the ABPT was not available.

[Blinky the 3-eyed Fish]

I am glad I could help.

[Tom Poje]

ugh, I knew this issue has come up before and I opened the...ugh...drawer of drawers where I stuff print outs of miscellaneous material, and I found some notes going back to Jan 1999 from PIX regarding the same question

Where is Mike Preston when we need him, he weighed in on this one as well years ago. If I remember correctly at the 2001 conference the conclusion from the panel was something like 'then we agree to disagree'

Anyway, back in 1999

One comment said that the IRS clarified that it was a reasonable classification - in writing, but unfortunatelly no actual cite was provided. supposedly it was from one of the National office memorandums.

I prefer the comment that said

"I can argue the position, if need be, that providing contributions to only those employees who stay through the end of the year is an objective business criteria for rewarding employees"

[Mike Preston]

Busy with 3/15 deadlines?

I am convinced that it is a reasonable business classification. I can't imagine the IRS actually challenging it. If they did, I can't imagine a rational judge agreeing with them.

Nonetheless, you should let the client know that the IRS appears to be on record saying that the ABT is not available in this case, although "on record" in this case consists solely of informal Q&A's.

I think the IRS is wrong on this one.

That, and $4.95 plus tax will get you a Frappuccino (sp?).

[Tom Poje]

Mike, would that be the Ides of March?

[Mike Preston]

Seems that way.