coverage question!

[Lynn Campbell]

in an age weighted profit sharing plan with an end-of-year employment requirement and no other contributions, I have 4 NHCEs and one of them terminated with more than 500 hours. This means 3/4 = 75% passes ratio percentage test. All participants will have the same EBAR due to age weighting. Is this OK?

If there were 5 NHCEs - with 2 of them terminating with more than 500 hours - then the plan would fail coverage and a plan amendment and additional contributions would be required for one or more of the terminated employees, is that right?

what are the answers if this plan is a tiered plan instead of age weighted with the same NHCE data? If the ratio test is met, must I include the nonexcludible NHCEs in the general test? If the plan fails the ratio test, then must I include all the NHCES in the general test.?

[AndyH]

1. Yes

2. Wrong. You can still try to pass the Average Benefits Test. You have not failed coverage until you've flunked both tests. Your ratios will pass the Nondiscrimination Classification Test. It comes down to the Average Benefits Percentage Test. Those are the two components.

3. No difference.

4 and 5. Yes, nonexcludable NHCEs must always be in the general test regardless of coverage results.

[Belgarath]

AndyH - on #2, I'd simply add an additional caution that some plans don't allow for this. They have the same type of safe harbor language that you see in prototypes, where you'd automatically bring in participants to pass 70% testing. I don't know how common this is in age-weighted plans, because I don't see many of them, but I have seen it.

[AndyH]

2 points for Belgarath. The document may be more restrictive than the regulations. Thanks.

i.e., WDTDS?

[SoCalActuary]

A further point:

Age weighted plans just about automatically produce the same EBAR for testing among all eligible participants. Exceptions include TH minimums, 415 maximums, or using different testing assumptions than the rates in the document.

Tiered plans have an advantage, since you can "over-benefit" one NHCE to pass the Avg Benefits Pct Test, presumably a younger lower-paid person.

[Tom Poje]

in reality it would probably be impossible to pass the average benefits percentage test - only in extreme case could you pass.

consider you example of 5 NHCE, but 2 quit.

to make things simple, assume all E-Bars are 1%.

you therefore have 3 NHCEs at 1 and 2 nhces at 0

avg = 3%/ 5 = .6

1 HCE avg = 1%

ratio = .6/ 1 = .6 so you fail avg ben % test.

Imputing disparity might help a little, but I still think you would end up below 70% and fail.

if the HCE was capped at the 415 limit then you have a chance.

by the way, you are allowed to impute disparity. It is a bizzare concept in an age weighted, years ago I read an article but an integrated age weighted plan. I didn't understand the mathematics of it, and the authors conclusion was that it wasn't worth the few extra $ in contribution it would generate, simply because of the complex calculations involved.

[AndyH]

But just to elaborate, the Average Benefits Test might pass, for example, if there were 401(k) deferrals aggregated with it, or if one or more of the NHCEs were old and the plan was tested on a contributions basis. That might be a bad design, but it is possible.