Coverage Testing - (a)4 testing?

[Guest mpark]

We have a 401k Plan with 3% Safe Harbor contribution plus an integrated profit sharing contribution.

How do we test for coverage? Relius shows 100% benefiting because some employees get the 3% Safe Harbor but not Profit Sharing because not there on last day, which is a requirement for PS cont alloc.

[Archimage]

First thing, coverage testing is under 410(b) not 401(a)(4). Second, if everyone is receiving a 3% SHNEC then your ratio test is 100% so you pass. The SHNEC IS a profit sharing contribution.

[Tom Poje]

3rd (at least my understanding of the rules)-

you now have a plan in which some people are receiving 3% nonelective (The SHNEC)

and others are receiving 3% + additional.

This is no different than having a class allocation plan and so might require cross testing.

or put another way:

Class 1 = SHNEC

Class 2 = SHNEC + additional ps

(The 3% SHNEC is not a top-heavy, so the special rule for treating those ees as not benefiting, running a 'dummy' 410(b) test to see if plan is still considered to have a safe harbor formula does not apply.)

for example, suppose all NHCEs terminated and only HCEs received additional. the govt tends to frown upon things like that.

hopefully you can pass using allocation method, or your additional ps contribution is not greater than 6% and therefore require a gateway minimum.

[Guest mpark]

This sounds like what we were told at seminar hosted by Derrin Watson.

So the Plan gets a 'pass' on 410(b) (meaning that the 3%'s only are counted as benefiting) but have to use general test because not safe harbor formula.

Any thoughts on how this would be reported on Schedule T - would you select all nonexcludable benefiting?

[Guest mpark]

Tom, can you elaborate on your answer regarding passing using alloc rates or ps allocation not greater than 6%

Thanks

[Tom Poje]

if ps contribution was less than 6%, then the most an HCE received was less than 9% (3% SHNEC plus 6% ps) - therefore gateway minimum would be satisfied.

Plan could test on allocation basis, thus no gateway required.

If less than 30% of the ees received SHNEC only, that implies over 70% received the ps contrib, and if that contribution was the same for all ees then you would pass ratio % test. If more than 30% received SHNEC only it is possible that you could pass the nondiscrim classification test.

yes, sched T would indicate all benefit, since all did. the confusion comes in that people think you have to report the fact the plan is cross tested or otherwise. that is not the purpose of the schedule T - it simply indicates if people received something, no matter in what amount, no matter how discriminatory.

[Guest mpark]

so if the Plan cannot pass on allocation basis, must cross test and min gateway kicks in

does min gateway apply to a terminated participant who only got 3% Safe Harbor but no PS because of last day requirement?

thanks for your help

[Tom Poje]

min. gateway applies to anyone receiving a nonelective contribution, and a SHNEC is still a nonelctive, so Yes they would get the gateway.

(lesser of 5% or 1/3 the HCE rate)

remember, when testing on allocation basis you can still impute disparity (not on the SHNEC portion) and that may be enough to help pass.

if testing otyerwise excludables separately the gateway would not apply to those ees unless that portion also has an HCE in the group, though I guess it would be 1/3 his rate.

[Guest mpark]

A few questions:

Facts are as follows:

1 HCE, 4 NHCE; 1 NHCE terminated without a break

Plan gives SHNEC to all participants (including HCE) and is considering integrated Profit Sharing which has 1000 hours/last day requirement - terminated NHCE would not get allocation

Before going to rate group testing, is restructuring available to prove design based safe harbor? If not, please indicate why.

Plan does not pass rate group testing because of integration factor. Can I impute disparity on an integrated formula (I know SHNEC cannot be imputed).

Does this plan pass broadly available allocation rates test and avoid gateway? If not, please say why.

I have been reading ERISA outline book Ch 9-11 so much that I don't know what planet I am on anymore.

Please help.

[Tom Poje]

if my brain is working correctly (and that is debatable at this time of year)

you indicated 4 NHCE

1 nhce gets 3% only

3 nhces get 3% plus integrated

hce gets integrated

for arguments sake lets say plan allocates 5.7% base plus 5.7% integrated

lets further ignore any SHEC for the moment

if you were to run the avg ben % test on an allocation basis

you would have 3/4 NHCEs with an e-bar of 5.7 + 5.7 = 11.4 (with imputing disparity)

if you run the HCE through the formula he would also have 11.4

(This assumes you are using 100% of the TWB)

therefore on an allocation basis the plan has 75% of the NHCEs = hce so passes rate group test.

In reality, as long as you are at 100% TWB the NHCE avergae should be the same as the HCE average - it is just the way the formula works - it doesn't matter what base % you use.

........

by the way, since you are at 75%, it sounds like this would meet the one item that says two groups can be treated as broadly available if you pass ratio % test.