Full Year Comp & Average Benefit Percentage Test

[Fred Payne]

Assume a cross-tested 401(k) with profit share eligibility requirements of 1 Yr, 1,000 Hours and 1/1 and 7/1 entry dates. For the participant entering 7/1, only comp earned in the second half is eligible for an allocation. The Plan, however, allows for participation in the 401(k) upon commencement of employment.

The Average Benefit Percentage Test is needed to pass the cross-test. For the Participant who becomes eligible for a PS allocation on 7/1, only the 2nd half comp is used for calculating the PS contibution. However, do I use this participant's full year comp and full year deferrals when calculating the EBAR for the Average Benefit Percentage Test?

If you think I should use full year comp and full year deferrals, would your answer be different if the Plan did not allow for immediate participation in the 401(k), but a participant could only defer starting the 1/1 or 7/1 after having met the 1 Yr, 1,000 Hours requirements?

Thanks.

[Blinky the 3-eyed Fish]

You are testing the nonelective portion of the plan, so it is clear that for rate groups compensation from date of entry for the nonelective piece satisfies 414(s). The average benefits test is just an extension of the general testing of the nonelective piece even though all money sources are considered, so the same compensation rules apply.

[Tom Poje]

my guess would follow along these lines.

suppose I had two plans, one DB and one DC. the db used full year, the DC used 7/1 comp.

If I recall (though I could certainly be wrong) you would calculate separate E-Bars and then aggregate the two.

I would think for the average benefits percentage test you would do the same, treat the 401k as one plan and the profit sharing as another and then aggregate.

[Fred Payne]

Tom:

I spent some time sleuthing out how Relius will calculate the scenario I described. Relius will calculate the EBAR for the Ratio Percentage Test based on the 2nd half comp. No confusion in this regard. But Relius computes the EBAR for the Average Benefit Percentage Test in one step, and not two as you guessed. Relius takes the Total Allocation (PS and 401(k)), calculates the Annual Benefit Accrued using the Total Allocation and divides the Annual Benefit Accrued by full-year comp to determine the EBAR.

If I calculate the EBAR for the 401(k) deferrals alone based on full year comp and add it to a separate calculation of the EBAR for the PS contribution based on second half comp, I get a much higher Total EBAR than using the Relius methodology.

The totals of the Annual Benefit Accrued using your suggested method vs Relius's is the same. The difference comes about because the separately computed Annual Benefit Accrueds of the PS vs. the 401(k) contribution are divided by different denominators, one of which is significantly smaller than the other because it's only second half comp. The resulting EBAR of the calculation using the smaller denominator is going to be a lot higher as a result--as will the total of the two EBARS.

Is Relius doing it correctly?

Thanks.

[Tom Poje]

Fred,

my guess is that Relius is not set up to handle the situation you described. hopefully it won't matter in your actual testing, but I've seen some close numbers before.

all this assumes that my assumptions on how to calculate things are correct.

Actually, it might be possible to get Relius to work. If I recall, if you have a money purchase and a profit sharing the system would produce 2 E-bars and then aggregate them for testing. It has been awhile since I tried running and printing a report like that. Thank my lucky start. But that would require you to set up one plan as deferrals only and another plan as profit sharing only. and you really dont want to do that. but my logic says that is how the system should really handle things.

an alternative approach would be to make some type of an adjustment to the deferrals to take into account the fact you have only comp for half a year but deferrals for the full year..

[Fred Payne]

Tom,

As always, I greatly appreciate your comments.

I've been using Relius to double-check the calculations I perform in a spreadsheet, and given the early 401(k) entry of this particular plan, my calcs were off on those participants who entered mid-year.

Another question about whether Relius is handling things correctly.

When Relius runs the Average Benefit Percentage Test, it brings into the population participants whom it excluded from the Ratio Percentage Test, specifically those who had less than 501 hours and were termed. (I test separately those who failed to meet Age and Service requirements.)

If I have to perform the Average Benefit Percentage Test because of a Ratio Percentage Test failure, do I include the termed participants who had less than 500 hours and were termed?

Thanks.

[Tom Poje]

if those ees could have deferred (or if the plan allows after tax contributions), then yes you would include them. average ben percentage test is an everything, its in there, etc.

(Thanks for the comments Fred, always hope that in some way my attempts at giving explanations or coming up with an example don't get too confusing!)

[jaemmons]

Fred,

I believe since you have different age/service requirements for the 401k and PS portions of the plan, RELIUS is using the lowest age/service conditions to determine your population group. As such, their IRC 414(s) compensation is based on these age and service requirements (i.e.- compensation from date of entry) which is why it is including full year compensation for average benefit percentage determination. Regulation 1.410(b)-6(3)(ii)