AB%T and Short Plan Years

[Archimage]

I am running the general test for a short plan year 7/1 -12/31. Under 410(b)-5(d)(3)(ii) it states: An employee’s employee benefit percentage is determined on the basis of plan years ending with or within the same calendar year. These plan years are referred to in this section as the relevant plan years or, in the aggregate, as the testing period.

Now in 401(a)(4)-1©(3) it states: The requirements of paragraph (b) of this section are generally applied on the basis of the plan year and on the basis of the terms of the plan in effect during the plan year. Thus, unless otherwise provided, the compensation, contributions, benefit accruals, and other items used to apply these requirements must be determined with respect to the plan year being tested.

I am a bit confused as to how to run the AB%T. Do I include both plan years that end in 2004 or not?

[Archimage]

I think I figured out the answer to my question. 410(b)-5(d)(3)(ii) deals with aggregating two or more plans, not the same plan like I initially thought.

Someone let me know if I am misinterpreting.

[Guest NotThatGBurns]

I believe you are misinterpreting and both plan years must be included. Let me explain how I analyze it.

It is true that under 401(a)(4) testing is performed on a plan year basis, and plans can only be permissibly aggregated if they share the same plan year. However, the rules for the average benefits percentage test under 410(b)-5 are different. Generally, all plans must be included in the test, including portions of plans mandatorily disaggregated into separate plans for coverage testing under 410(b) [there are special rules for DB/DC groups, of course - the IRS wouldn't want to miss an opportunity to confuse us as much as possible or they might ruin their hard-earned reputation for bringing mind boggling complexity to every set of rules they issue, but let's not get me started)]. The bottom line is that 410(b)-5 separately defines the testing group (plans to be included in the test) and the testing period (plan years to be included in the test). The testing group is defined in 410(b)-5(d)(3)(i) and is not at issue here. The testing period is defined separately in 410(b)-5(d)(3)(ii) as plan years ending with or within the same calendar year.

Apparently, you have one plan, so that is your testing group. Your testing period - separately defined without any exception for short plan years - consists of all plan years ending with or within the same calendar year, which would be the plan years ending on 6/30 and 12/31.

Hope this helps.

[Archimage]

Well, I spoke with two ERISA attorneys and they both said that the plan years would not be aggregated for purposes of the AB%T.

[AndyH]

Archimage, I find your question to be unclear.

Do you have one plan that had a 7/1-6/30 year and is changing to calendar?

If that is the case and assume for a moment the short year ends 12/31/2004, are you then asking if you test the short 2004 year do you include 6 months of data or 18 months of data? If this is the question then I say 6 months.

Or you might be able to justify using calendar 2004 data under the substantiation guidelines, but I'd have to look at that.

But perhaps the question is something different?

[Archimage]

Nope, you got it. That was what I was asking. My software (Relius) is pulling in the prior plan year and they said that was the way it was supposed to work. I thought that was wrong and so I posed the question and did some more research to make sure I was right.

[Guest NotThatGBurns]

I have an ERISA attorney that disagrees with yours. Perhaps you could post your ERISA attorney's rationale.

[AndyH]

NTGB, are you suggesting that 18 months of data should be included in the test?

[Guest NotThatGBurns]

Why not 18 months?

Let's set aside the short plan year issue for a moment. Assume two plans of a single employer (or controlled/affiliated service group) with different plan years, one ending 6/30 and one ending 12/31. [Note: Most definitely not anything I would recommend setting up, but people do what they do, then the TPA often finds out after the fact, and is left stuck in their tangled web. Look at it as a revenue opportunity and go for those extra fees!] Assume an employee participates in both plans. Clearly, 410(b)-5(d)(3)(ii) anticipates such a scenario when it indicates that the testing period consists of plan years ending with or within the same calendar year. Would you argue that only 12 months out of the 18 months of contribution activity would count for that employee? Which 12 months - the first or last? Where is that restriction set forth in the regulations? The wording in 410(b)-5(d)(3)(ii) refers only to plan years ending within the same calendar year; it doesn't mention a 12-month limit per employee. The regulations do provide for calculation of separate EBARS for the two plan years that are then summed for the test. If the intent were to limit any given employee to 12 months worth of contribution activity, wouldn't the rule for determining those 12 months logically have been placed there? (Not that I'm positing that the IRS is always logical, of course. I promise never to make that argument.)

Now, if you accept that 18 months worth of activity counts for the hypothetical scenario (OK, so I'm an optimist), in the short plan year scenario, one could reasonably argue that the rules OUGHT to be different. But the regulations don't provide any special rules for short plan years. Hence the logic set forth in my previous post.

That said, Archimage should of course follow the guidance of his attorney, if for no other reason than it provides someone to sue if the IRS should at some point audit and disagree! But we could learn more if he is able to provide his attorney's analysis of how the specific regulations apply to this situation. And that is the ultimate purpose of these boards.

Archimage - Assuming you are using one of the recent releases, do you realize you can exclude a plan from the average benefits percentage test in Relius by going into plan specifications for the plan you want to exclude, going to the Miscellaneous form, and selecting the checkbox option to exclude the plan? That will allow you to test as instructed by your attorney. Another one of those hidden options that is not very well advertised.

[Archimage]

I do realize you can do that but this is not two separate plans. This is one plan.

I did not ask the attorney for their rationale because I only cared what it was if they disagreed with me. My rationale is as follows. 410(b)-5(d)(3) is titled "Plans and plan years taken into account". I interpret that as meaning what plan years are tested when you have multiple plans. Now if it was just titled "Plan years taken into account" I would feel differently. The regs in this section also refer to multiple plans a number of times. I do not see any reference to a short plan year whatsoever. Anyway, that is my rationale.

[jaemmons]

Regulation 1.410(b)-5(e)(1) "...For this purpose, the plans in the testing group are the plan being tested and all other plans of the employer that could be permissively aggregated with that plan under paragraph (d) of this section..."

The permissive aggregation (paragraph (d)) describes situations when employers sponsor more than one plan. Since this is one plan, just with a short plan year, unless it is a DB using the 3 year averaging rules, wouldn't the ABT's be determined for the 7/1 thru 12/31 testing period only??

[AndyH]

Jaemmons, yes, absolutely IMHO.

NTGB, if you do an ABPT for two plans one with a 6/30 year end and another with a 12/31, you are using only 12 months of data for each, data corresponding to the plan year. Absolutely not 18 months.