Cross tested plan; same percentage for both groups

[Guest Julie Woulfe]

Cross tested plan - If the allocation percentage for a particular year is the same percentage for both groups, do you have to test it?

[Tom Poje]

well, technically you have a safe harbor formula,

just for the heck of it, imagine what would happen if you tested it on an allocation basis. what would your results be?

[Guest Julie Woulfe]

I don't know what the results would be...it wouldn't pass?

So, if it is a safe harbor formula, is it OK....even if it would not pass cross testing because of a very young HCE?

[Archimage]

It wouldn't pass on a benefits basis but it would pass on an allocations basis.

[Tom Poje]

Julie:

My apologies! I assume too much at times.

When you test on an allocation basis all you do is simply take

contribution / compensation

thus if everyone receives the same percentage of pay, everyone will have the same, for lack of better term, E-BAR. That is not really a correct term, because it is not an Equivalent Benefit Accrual Rate, it is the actual Allocation Rate someone has accrued when you test contributions on an allocation basis.

The only way a plan couldd fail under those conditions would be a plan that has a last day provision or hours requirement and enough people fail to receive a contribution.

If a plan is integrated up to the maximum (5.7%) then if you were to actually test on an allocation basis AND impute disparity everyone would still end up with the same Allocation Rate.

In fact, if your software does nondiscrim testing on an allocation basis, I suggest try testing a fully integrated plan (e.g. 5.7% and 100% TWB) and see the results.

One, it is a quick an easy check to make sure the software allocated the contribution properly. Two, I always hope it will be one of those things in which one looks at the results and says 'no wonder this formula is considered to be safe harbor. when you test it everyone is equal.

[Guest Julie Woulfe]

Thanks, Tom....I basicly understood all that...I was just too frazzled yesterday afternoon to think it all through. By biggest concern here is the document says the allocation is on a cross testing method. So if I allocate pro-rata, I think that is doing something different than what the document says. But perhaps that is OK, since my pro-rata allocation is a safe harbor formula...... What do you think?

[Tom Poje]

well, guess I am not sure what a document means by 'allocation on a cross tested method'

an allocation is based on a formula, in your case it sounds like people are in classes and it is probably comp to comp. I guess the document could be using the term 'allocation on a cross tested method' but I don't know if that term makes any sense.

now, to prove a plan is nondiscriminatory, one does (a)(4) testing, which can be on an allocation basis or on a benefits basis. if tested on a benefits basis then you are cross testing because you are converting the allocation to a benefit.

I suppose a document could require you to test on a benefits basis, why I don't know, I suppose it would be no different than some type of fail safe language. That would be ugly if the document forced you to do that.

[Guest Julie Woulfe]

OK, I got it.....thanks. Yes, the document says people are in groups and it is comp to comp within the groups....and I will pass testing on an allocation basis.

[Guest hog4you2]

so Tom: from your response above regarding allocation testing using disparity, can you really allocate, say, a 5% rate to all but integrate anyone over the limit as a "fallback" in a new-comp plan design?

Or does the plan need to specify integration as part of the formula in that situation?

[Tom Poje]

generally you would have to specify integration as part of the allocation formula.

of course, there are scenarios where it doesn't matter. Remember, you have to follow the terms of the document. you have to have a definitely determinable formula

suppose you had 2 classes of people, each class is allocated comp to comp

classes are: HCEs and NHCEs

and the HCEs all make over 200,000.

you allocate 6% to the nhces

by selecting the right dollar amount provided to the HCEs you could end up with a net effect of allocating 6% + 5.7> TWB

If you were to test on an allocation basis it would pass testing. since you are not cross testing, no gateway is necessary, though it really wouldn't matter since all the NHCEs received enough anyway.

On the other hand, why have a plan that is set up as a class plan and then run a formula like this? I suppose initially the plan might have worked as a class plan, but due to turnover of young employees it no longer works.

I bet if you look at most cross tested examples they look great - but no one asks "What if the youngets employee quits?" and at that point, a many of those examples fall apart.

[Earl]

Or what if the older of two owners sells his stock to a new employee that is 10 years younger than any other employee of the company? (And actually he was hired before the prior year but since he was not eligible he did not "need" to be on the census report.) So now he is key, HCE and eligible. (ka-boom... the sound of a retirement plan exploding.)

Think that might make a difference and think you might ask your administrator BEFORE the sale takes place to see what might happen?

Well, hmmm, maybe.... Naaaahhhh....