smoothly increasing plan fails avg bfts percentage test

[dmb]

I have a top heavy plan that passes gateway using "smoothly increasing" bands. The allocation rates range from 21% of comp down to 3%. The plan fails the average benefits percentage test to the point that the lower allocation groups need to be increased to the 8% range. I also have a few active participants that have not met the hours requirement for the 8% allocation, but must receive a 3% top heavy allocation. My question is if i have to increase the allocation rate for some of the bands to 8% does that prevent the plan from using the "smoothly increasing" method to pass the gateway?? Must i then give 5% to the Top Heavy only participants?? Thanks.

[Tom Poje]

you indicated the you had a 'few' ees who failed to have enough hours and then therefore received top heavy only.

Unless you have a very strange plan, it is almost impossible to fail testing.

1. all E-Bars should be the same. the NHCEs at the youngest age might actually be greater if they received top heavy rather than the allocation through the formula.

2. if one (or more) of the ose young ees was an HCE, then you might fail testing.

3. since all e-bars should be the same, and the avg benefits test gives you 70%, that would mean you would have over 30% of the NHCEs who failed to receive anything (e.g. termed with greater than 500 hours and no allocation to terminees.

of course the plan could have deferrals and match so maybe that is why the avg ben % test fails.

still, even given all that, you should be able to pass rate group testing as that only requires 70% as well. and again, you would have to have 30% terminees to fail.

[dmb]

Thanks for the response Tom, here is some more details that may explain why the plan is failing. The allocation tiers are Age 57 and up receive 21% of comp, each year younger receives 2% less, so participants age 56 receive 19%, age 55 receive 17% and so on until you get to age 48 and under receive 3% of comp. Besides the owners, there are only one or two participants over age 48. Also, the main reason the plan is failing the ABT is due to the 401k portion. The wife and two sons of the owner are all deferring almost 25% of comp (they never deferred until this year, and i don't know why they started this year). Also, there are employees (both HCE and NHCE) that have waived participation in the plan. The rate group test isn't a problem.

[Tom Poje]

ah, my mistake. when you said smoothly increasing, I assumed age weighted. I have never seen someone take the trouble to set up a plan with the ranges you noted.

If a plan is smoothly increasing then that is suppossed to satisfy the gateway minimum. if I recall, any top heavy allocations would not toss the plan out of being smoothly increasing, but I haven't looked it up for awhile.- yes it is in there at 1.401(a)(4)-8(b)(iv)(2)(D) or something like that.

it doesnt surprise me avg ben % test fails if owners kids (youngsters) are deferring. that will blkow that test out of the water.

if age 56 receives 19% and age 57 receives 21%, I dont see how the rate group test would pass since

19 * 1.085 = 20.62. which is less than 21. unless there are a lot of 3 % people age difference of 24 that will have an ebar that will be greater than the hce.

[dmb]

I didn't set up this plann, we took it over, but i'm not sure you answered my question. does the fact that allocations rates have to be changed to pass the ABT change the status of the plan being "smoothly increasing" and therefore require the 5% gateway allocation to the top heavy only participants??

[Tom Poje]

My logic (which could certainly be wrong) says the following:

1. Plan has smoothly increasing schedule (Fact)

2. by regulations that satisfies one of the three requirements permitting me to cross test.

3. I now cross test and plan fails.

4. therefore, I must take corrective action to pass.

this corrective action does not require me to go back to step 1 and change my formula or take me out of having smoothly increasing schedule. it is merely some type of corrective action after I have met the requirement which allows me to cross test in the first place.

now, if I have to do this every year, then I have poor plan design, but also you start falling into the 'series of corrective amendments' which is frowned upon.

[dmb]

Thanks Tom, i appreciate your help.

[Blinky the 3-eyed Fish]

but also you start falling into the 'series of corrective amendments' which is frowned upon.

Tom, can you elaborate on this?

[Tom Poje]

thanks for making me look this one up.

I looked it up under -11(g) and actually it looks like the corrective amendment 'is not part of a pattern of amendments being used to correct repeated failures with respect to a particular benefit, right, or feature.'

Thus, I guess in this case it would not apply as the corrective amendment is used for nondiscrim purposes (3)(v) and not brf (3)(vi).

still, sounds like a pain in the rear if you have a corrective amendment every year.

[Blinky the 3-eyed Fish]

Yeah, that's one I learned from Mike Preston. I thought maybe though you had some additional information, so I figured I'd ask.

[jquazza]

I am not sure this is smooth interval at all given the fact that the first band is 48 years. You can't have it at more than 25 or if you do, you have to consider the first band from age 25 to see if all age bands are even. In your case, the first band would be 23 years, the next one only 1 year.

You're not getting out of gateway that easy...

[AndyH]

dmb, I'm wondering why you are doing the ABPT at all with this weird allocation schedule. How old are the owners? How old are the other participants?

This schedule seems to increase EBARS then starts to decrease them beyond a certain age.

Jerome probably has a point, but I'm curious first about the rate group results aside from the gateway issue.

[dmb]

The owner and his spouse are both over 57, their two children are around 30 yo. There is one NHCE who is 49, 5 or 6 other HCEs that are under 47 and the rest are NHCEs all under 47. Some other issues involving the children have come up and right now we are on hold. Thanks for the input.