Average Benefit Test

[Lori Foresz]

Hi,

Can someone please confirm that when running a cross-test for a 401(k) profit sharing plan, if the rate groups do not pass on the ratio percentage test so that the ABT is used, are the 401(k) contribuitons included in the ABT?

Please help.

Thanks!!

[Guest Doug Goelz]

Yes -- if each rate group's ratio % is less than 70% (or higher, if snapshot testing is being utilized and a 5% or 10% adjustment to the threshold is required), then the AB%T must be passed in order for the rate groups to pass on a lower value. Under the normal rules, the AB%T requires the inclusion of 401(k) deferrals and matching contributions.

[Tom Poje]

but only for the AB%T, not for the rate group group test.

or perhaps a better way of saying it,

yes, you include deferrals in the ABT, but only in the AB%T portion of that test, not the nondiscrimination classification portion of the test.

[Lori Foresz]

Thanks! Tom, just to clarify. The 401(k) is not being included in the calculation of the EBARs and the rate group analysis. But, it is being included in the ABT if the rate groups cannot pass the RPT. What do you mean by nondiscriminatory classification test? I want to make sure I have this right.

Thanks

[Tom Poje]

ok lets look at it this way

you have a plan with 1 hce and 10 nhce

4 of the nhce receive 3% and everyone else receives 10%. Plus it is 401k so there are deferrals and matches. there are no hours restrictions or last day provision on any contribution.

for simplicity purposes testing is done on an allocation basis.

for 410(b), you have 3 tests:

401k

401m

nonelective

we made this easy, no restrictions, so everyone benefitted for each of the tests. the 5500 is easy, check box 3d.

however, since people received different rates, nondiscrim testing must be done.

again there are 3 tests

ADP - the deferrals - must pass the 2 test (or in rare cases if the NHCEs defer over 8% on the avg, then the 1.25 test. I have never seen this happen)

ACP test - the match - basically same as above

nonelective - the profit sharing piece. Unlike ADP and ACP there is no '2 test'.

And unlike those tests each HCE must pass on a stand alone basis, rather than by the average of the HCEs. We are considering the simple case with only one HCE. This HCE must have at least 70% of the NHCE in his rate group. (NHCE received an allocation rate or an accrual rate greater than the HCE) Only NONELECTIVES are looked at in this test. It excludes deferrals.

In this example only 6 of 10 received the same rate, so testing failed.

Proceed to the ABT.

There are 2 parts, and you must pass both parts.

There is the avg ben % test. this test includes ALL contributions, including deferrals and match. this test passes with a 70% rate. Again, all contribution are included. everything.

Then there is part 2 of the ABT.

This is the nondiscrimination classification. ONLY NONELECTIVES (and forfeitures since they are nonelectives are included) to pass this test, you take the ratio % test from above, and it must be greater than the 'midpoint' between the safe harbor and unsafe harbor %. this is derived from the NHCE concentration in the 'plan' being looked at (the nonelective portion).

so when someone says you include all contributions in the ABT, yes, it is true, but only in one portion of that test, but not in the other. and you have to pass both to pass the ABT.

[Lori Foresz]

Thanks so much Tom. In the paragraph that starts "the nonelective-profit sharing" did you mean to say that deferrals are excluded? You say only NONELECTIVES are included and then say deferrals are included. I presume this is the rate group test and deferrals are excluded here????

Thanks again.

[Tom Poje]

yes, I meant to say deferrals are excluded. guess I can't type and think at the same time.

dang, I can't think or type period. I will go back and edit that paragraph