ABT - NHCE concentration %

[jaemmons]

If a plan contains a cross-tested profit sharing feature and a 401(k) feature, when determining the NHCE concentration % for the average benefits test (plan is cross-tested), can you exclude terminees with <500 hours? I don't think you can, but just need clarification.

Thanks for any thoughts.

[Tom Poje]

nondiscrim classification test is found under 1.410(b)-4

It only refers to 'the plan'.

1.410(b)-7 defines plan and requires each part of a 401(k) to be disaggregated.

1.410(b)-5 refers to the avergae benefits percentage test. this test requires you to aggregate all 'plans' this is the exception to the rule.

therefore, I hold the belief that when determining the nonhighly concentration % test you would only count those bodies in the actual 'plan' [disaggreagted]

therefore, the terms with less than 500 hours would be xcluded if they didn't benefit.

This is an option of course, you could count them, possibly you would want to if there was an hce in the bunch. If two or more controlled groups are involved and you are not aggregating for testing, then you would have to include the terminees from the other company not included.

[jaemmons]

Thanks Tom,

Since the average benefits test takes into account all employees who meet any of the separate eligibility conditions within this plan, the nhce concentration % test must take into account the same employees (Reg. 1.410(b)-4©(4)(iii)). With this in mind, how could you have an option to count or not count terminees w<500 hours, as this statutory exclusion does not apply to the 401(k) portion of the plan?

Our software defaults to not include them, but I think for a plan w/ a 401(k) feature, it should default to include them.

[Tom Poje]

perhaps the ERISA outline book sums it up fairly well 8.79 2003 edition

"If 2 or more plans (or two or more portions of a single plan) must be tested seperately under the disaggregation rules, they cannot be aggregated to perform the ratio test or the nondoscriminatory classification test."

or perhaps another way of looking at it

I am testing coverage in a 401(k) plan

for the 401(k) portion I include everybody to determine the nonhighly concentration % since everybody can defer. Usually this test passes at 100% so no one ever thinks of performing the nonhighly concentration %, but conceivably it is possible, especially if testing a controlled group separately -you might fail the ratio % test for coverage.

but for the nonelective portion, since terminees are excluded from the contribution, a special rule allows me to exclude them entirely. I dont include the 401k terminees because the rule is I have to disaggregate bodies from the 401k bodies.

it is only the avg ben % test where everything gets combined.

now, the problem with the software is that it is hardcoded to excluded all terms with less than 500 hours. (Though I think if you enter a 0 for hours in plan specs after running everthing the system would actually include all these terminees.)

if you have 1 or more HCEs who terminated with less than 500 hours it might be beneficial to include all terminees.

the terminee < 500 hour rule only apples to 'participants'. so in the case of a controlled group, if you were looking at Company A separately, you could not exclude a terminee from company B because he was not a participant in Plan A.

oh nuts, all that was probably as clear as mud.

[jaemmons]

Tom,

This is from Reg. 1.410(b)-4©(4)(iii)(The bold face was added for emphasis)

(iii) Nonhighly compensated employee concentration percentage. The

nonhighly compensated employee concentration percentage of an employer

is the percentage of all the employees of the employer who are nonhighly

compensated employees. Employees who are excludable employees for

purposes of the average benefit test are not taken into account.

I know that you cannot aggregate mandatorily disaggregated plan parts when performing ratio/non-discriminatory classif. tests, but I am interested in the nhce who should be included in the concentration percentage determination. Based on the above Reg section, an employee can only be deemed excludable if he/she does not meet all eligibility requirements under the plan (plan has 6 mos for 401(k), 2 years for profit sharing). How can you have a different nhce concentration percentage for each disaggregated source?

[Tom Poje]

I've tried looking for a clear black and white example, can't really find one. however

ERISA Outline Book says (9.125, 2003 edition)

Applying rate group test to disaggregated plans

...In applying coverage test to a rate group, the ratio test or the nondiscriminatory classification test, whichever is applied, generally would treat employees in disaggregated groups as excludable employees...

emhasis from the book.

Logically I still don't see how you can say

I perform ratio percentage (Carving out those excludables)

I now compare this to the safe harbor/unsafe harbor or even midpoint determined by the group of employees as a whole(not carved out).

thats not comparing apples to apples.

but then there is no logic to the regs at certain points.

The problem is that the avg benefits test is really two parts. one part(avg ben %) you include all employees, the other part you dont. so for the non highly concentration % how do you calculate. I would hold be consistent, for the avg ben% test count all, but that is moot since you dont use the non highly concentration % for anything here.

I suppose it gets down to the same argument some use in regardless to testing 'otherwise excludables'. There are no clear examples in the regs. some hold for the avg ben % test you cant test separately. You test 'All'. ERISA Outline Book gets into this discussion. see 8.93

[AndyH]

How about TAG? After all, they have real names associated with their answers, unlike for example, "Blinky the 3-Eyed Fish" said so.

Honest.

http://benefitslink.com/boards/index.php?showtopic=27773

[jaemmons]

Thanks for the feedback Tom. I agree with your statements about comparing apples to apples, but a literal reading of the 410b regs makes it seem as if the nhce concentration % must include the same employees who are included in the average benefits test. It's definitely confusing and nowhere is it clarified, so again, I thank you very much for your comment.

[Tom Poje]

A couple of years ago at an ASPPA conference a speaker held the same position you count all, someone questioned that but it went no further than that. gee, no one carries around a copy of the regs to point out cites and argue the point, upon leaving the room I know at least 2 or 3 others that said you can't count all. so looks like we are all in a group wishing it was a lot clearer.

At least the ERISA Outline Book, at least in some way, matched your quote from the regs about 'excludables'- or at least one way of looking at it.

[Guest penman]

I think you exclude 'em due to dissagregation.