Using safe harbor allocation when X-testing doesn't work

[dmb]

It is my understanding that if cross testing doesn't work a safe harbor allocation may be used. I have that situation, however, when i use a safe harbor allocation, the plan fails the 410(b) 70% coverage test (it fails that regardless of the allocation) and also fails the rate group (midpoint) test. I guess my question is if i'm using a safe harbor allocation does the plan have to pass the 401(b) 70% coverage test?? Thanks.

[AndyH]

The question is a bit unclear to me but I think the answer is yes.

Safe harbor status is only for 401(a)(4) testing.

The plan also needs to pass the coverage requirements of 410(b) by passing either the ratio/percentage test, which you say fails, or the average benefits percentage test. But for coverage the plan is tested as a whole. There are no rate groups. Does this answer your question?

[dmb]

I'm not sure if that answers my question. Sometimes i confuse myself when it comes non-discrimination testing. The plan passes the average benefits test, but i thought that if the plan doesn't pass the 70% coverage test, it needed to pass the average benefits test as well as the rate group test.

[Tom Poje]

ooops. something is a miss.

you can't "if cross testing doesn't work a safe harbor allocation may be used" because you have to follow the terms of the document.

now hopefully most cross tested plans are by class, and so you could allocate the same % to everyone, and in that sense of the word, you have a safe-harbor formula.

now:

coverage is different that nondiscrim testing. you indicated you fail, that the ratio is less than 70%.

If plan has fail safe language, you would have no choice but to bring people in by whatever the document says.

if there is no fail safe language, then you still might pass coverage by using the average benefit test. since you failed ratio percentage test (and if there are no deferral/matches you probably wont pass unless imputing disparity helps.)

if you still fail coverage, you will have to use corrective amendment to bring people in (or increase contribution to some of the rank and file) but correctives have to be in place withing 9 1/2 months of plan year end.

perhaps to answer your question:

before even worrying about your formula(safe harbor or otherwise), you have to pass coverage.

[Blinky the 3-eyed Fish]

No, that's not correct. When you say average benefits test, it appears you are talking about coverage testing under 410(b). As Andy said, there are no rate groups in the average benefits test for coverage. First you must pass reasonable classification, then your benefiting percentage of NHCE's versus HCE's needs to be above the safe harbor percentage, and then you need to pass the average benefits test comparing benefits of NHCE's versus HCE's and that needs to be above 70%.

Of course my response is to dmb, but Tom jumped ahead.

[AndyH]

Have you considered a "special UL"?

Only kidding of course. How about a 412(i)?

Oh, late Friday again. We're all jumping at cross testing questions cause they're few and far between at times.

My guess is that dmb has a plan that fails the NCT portion of the 401(a)(4) general nondiscimination test. If he can alter his allocations so that they are uniform, then this test is unnecessary because the allocations would qualify for "safe harbor testing".

dmb, if this is true, then forget rate groups. Does you plan as a whole pass the 70% ratio/percentage test?

If you allocations qualify for "safe harbor testing" and your passes the ratio/percentage test as a whole, you are DUN.

[dmb]

Andy, you nailed it. The plan fails as a cross tested plan and I am using a uniform allocation, but the plan fails the 70% coverage test.

[AndyH]

Then, as Tom correctly points out, you need to make sure that your plan document doesn't have some language that forces you to do a certain thing, namely bring in more employees.

If it does not, try passing coverage by using the Average Benefits Percentage Test. If that fails, you need to correct the failure by an amendment under 1.401(a)(4)-11(g).

[dmb]

Thanks Andy, the plan does pass the Average Benefits Percentage Test as well as the Modified Facts & Circumstances portion of the Average Benefits Test.

[Blinky the 3-eyed Fish]

Thanks Andy, the plan does pass the Average Benefits Percentage Test as well as the Modified Facts & Circumstances portion of the Average Benefits Test.

How did you determine it passes the facts and circumstances portion? Is the coverage ratio not above the safe harbor percentage?

[dmb]

Yes, the coverage ratio is above the safe harbor ratio.

[Guest quinn the car fixer]

if the doc is written that all ee's are there own "class" --no named classes--if 1 rate group fails and it needs 2 more nhce's to pass and i target those 2 only--not bring up all nhce's--do i lose my reliance on the abpt? do i need to get to 70% for that rate group? if so, do i lose it for the all rate groups in the plan?

[AndyH]

quinn, if I understand your question correctly it is a good one. I think you are concerned about the precondition that the eligible group be defined in a reasonable manner, based upon objective business criteria?

And I assume that you are referring to a corrective amendment under 11-(g)?

We default to identifying new participants by either hire date or birth date, or by reference to their status in the test, but in any event we do not define them by name. The amendment tells you how to determine who to bring in, not who to bring in. I think that would satisfy the objective business criteria condition.

Naming them or listing by SS# could create the issue that you have alluded to.

[Guest quinn the car fixer]

andy--let me clarify-- i am not bringing in anyone to pass coverage, but just giving a higher allocation to specific nhce's to pass the rate group. we are determining who to bring up by whose ebar is closest to the hce.

[AndyH]

Then that is an amounts issue, not an eligibility issue, so I don't think that has any impact on the testing other than the improved results. But I would still devise a rational approach anyways.

[Guest quinn the car fixer]

andy--

it doesn't preclude me from relying on abpt? what would you consider a rational approach?

thanks

[AndyH]

No. I don't see why it would. The allocations need not be reasonable; just the criteria for who gets benefits.

The amendment might say that for the year ending ______, in order to satisfy the nondiscrim..... requirements of ........, the plan is amended to include in class B the minumum number of NHCEs, ranked by youngest age, necessary to satisfy the general nondiscrimination test.

Just one example.

[Guest quinn the car fixer]

thanks andy