Restructuring Plan(s)

[flosfur]

.....But, the plan can be broken into components, with different component plans tested differently.

For example, the plan could be broken into components with one tested on the annual method and one on the accrued to date method.

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Ok Andy - I have a DB plan which could benefit by breaking it into component plans and having different formulas for the compenent plans. I want to stick to just one DB plan and but not split into DB/DC plans.

In a handout from an ASPA conference (2002 Summer Academy) on plan restructuring, one of the listed requirements is: Each component plan must satisfy 410(b) ....and then goes on to say "The special rules for rate groups (where the rate group is deemed to be a non-discriminatory classification) does not apply to component plans...."

Questions

1. I could not find where this is stated in 1.401(a)-9. Is it mentioned somewhere else?

2. Which deemed non-classification provisions of the regs/code does this refer to? Is this referring to the non-classification test in 1.401(a)(4)-2©(3)(ii) - rate group's ratio % between safe/non-safe ratios .. ?

3. If it is 1.401(a)(4)-2©(3)(ii), does this mean each rate group has to have 70% or better ratio? If that’s the case, wouldn’t the average benefit % test for rate groups become redundant?

Of course the above only applies if a component has a non-safe design.

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Any special/common pitfalls one should look out for?

Being new at this, I am treading with care.

Thanks.

[AndyH]

Flosfur, first look at 1.401(a)(4)-9©(2) "A plan may be restructured into component plans, each consisting of all the allocations, accruals, .......provided to a selected group of employees. The employer may select the group of employees used for this purpose in any manner, and the composition of the groups may be changed from plan year to plan year."

The key to that was "any manner"

So assume you have broken the plan into 2 subplans in an arbitrary manner. Each subplan must satisfy 410(b). If your groups are chosen arbitrarily, you do not have a reasonable class of employees in each component plan. Therefore the ABPT is not available since the reasonable requirement is a prerequisite for 410(b) testing, specifically being in the Nondiscriminatory Classification Test ("NCE").

So, if your components are "cherry picked", the ABPT is unavailable. But, no problem. You just need to have each component plan pass the Ratio/Percentage Test.

Once each component passes 410(b), the plan as a whole is deemed to pass 410(b).

Now, on to 401(a)(4).

1.401(a)(4)-3©(2) says use the rules in 1.401(a)(4)-(2)©(3) , and under (2)©(3)(ii) , "A rate group satisfies the NCT test of section 1.410(b)-4 (including the reasonable classification requirement of section 4.110(b)-4(b)......."

This gives you a free pass through the reasonable classification test for purposes of 401(a)(4) testing, NOT 410(B) TESTING, HOWEVER. But, you've already passed 410(b) by now.

So, do your rate group testing for each component plan. Each must satisfy the midpoint, then the plan as a whole must pass the 70% ABPT (unless each rate group has a R.P of 70% or more in which case it is unnecessary). And here you can use different testing options because you've got different "plans".

Not that tough once you've done it a few times. I happen to have been forced to learn this stuff because I had to test a DB/DC combo that Ed Burrows designed, and these techniques are essential to doing that.

[flosfur]

Thanks Andy. That's very helpful.

This is what I was missing.

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This gives you a free pass through the reasonable classification test for purposes of 401(a)(4) testing, NOT 410(B) TESTING, HOWEVER.  .....

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If your groups are chosen arbitrarily, you do not have a reasonable class of employees in each component plan.  .....

What is arbitrary? Since this is subjective, how does one know where one stands?

Here is what I have - Employees are split into two groups:

Group A (component plan A) consists of HCE 1 & 2 and some NHCEs.

Group B (component plan B) consists of HCE 3 & 4 and NHCEs not in Group A.

Both groups (/sub-plans) pass the 410(b) easily.

Benefit formula for Group A is X% of avg comp reduced for YOP <25.

Benefit formula for Group B is Y% (much lower than X%) of avg comp reduced for YOP <25.

Since both sub-plans have safe harbor formulas I think the above should be OK - except for the arbitrary selection of the groups?

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As a separate question: is there a problem with using names of employees instead of job titles when defining groups or excluding someone from a plan?

Thnaks for help.

[AndyH]

Your situation is a little different, actually easier. If you can restructure into two subplans, each of which is a safe harbor and can pass 410(b) then it is my understanding that you have a safe harbor plan and you do not need to test under the general test.

To answer your questions about what is reasonable, the only real guidance that I know of is in 1.410(b)-(4)(b) "reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generlly include specified job categories, nature of compensation (i.e. salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as enumeration by name is not considered a reasonable classification"

But, once again, you do not need reasonable classes if you can pass ratio/percentage for each subplan. You can use names or ss#'s for example, for determining who is in a plan provided that you can pass r/p. And within a plan, you can use names or such for purposes of determining benefit levels if each subplan or benefit level passes r/p.