New Comparability Provisions

[Randy Watson]

Can someone tell me what plan provisions are required in a dc plan as far as new comparability plans go? For example, is it necessary to include an explanation of the gateway test etc....? This does not seem necessary to me. I believe that we can essentially state that allocations will be made to the various classes of participants and that 401(a)(4) will be satisifed through cross testing. Someone please help.

[Alf]

The allocations need to be definitely determinable, but the testing detail does not have to be in the plan. The groups and rates need to be specified.

[Randy Watson]

Thanks, Alf. The person that drafted the plan has a provision stating that each participant in the plan constitutes a separate allocation group. Is that possible?

[Alf]

Everyone seems to think it is ok, but I originally understood that the IRS didn't like individual rate groups. Hopefully, more will chime in.

[Blinky the 3-eyed Fish]

They are ok with it at the moment.

[AndyH]

If that sounds a bit fishy, then ....... but it is wise and accurate.

[Tom Poje]

yes it is possible to have each individual named as their own group

yes it is possible to have language that simply states a gateway minimum will be provided. (In fact, you have to have such language to provide the minimum gateway)

if each person is in their own group, then coverage testing may be affected if an individual does not receive an allocation. you fail reasonable classification test.

however, chances are, such an individual would probably be HCE, so you would not need to rely on the Avg ben test to pass coverage anyway.

[ERISA1]

IRS confirmed the viability of these designs at the last annual ASPPA conference.

HOWEVER, in addition to the numerous qualification/testing twists required by these designs, you've got to be very careful to avoid getting into trouble in other areas. For example:

You should not use the flexibility of the design to select people for benefits on the basis of youth because that violates age discrimination rules under the Code and ADEA. I've seen designs that give just enough to the 21 year old to get her into the rate group. Then, they give a little more to the 25 year old, etc. The older employees end up with gateway minimums - less than the younger employees. Cases like this are headed for trouble for sure.

Also, you have to be careful not to turn your profit sharing arrangement into a CODA. This happens if you let partners or shareholders vary their rate of contributions. Just because the document allows it, doesn't mean it's legit.

I really question whether these designs are worth all of the effort.

[jquazza]

It's not the effort of the sponsors. A TPA will do all the work for the sponsors for few thousand dollars and they can realize not only huge savings in terms of cost of employee benefits but also accumulate greater benefits for themselves.

[AndyH]

ERISA1, I don't understand your comments about age discrimination and the gateway.

You stated that 25 year olds get more than 21 year olds and imply this is a pattern through which older employees get less of an allocation. Kindly explain what you mean. Thanks.

[ERISA1]

I appreciate the follow up question. In order to understand the problem I'm describing, you have to have some feel for cross testing and rate group testing under Code Section 401(a)(4). Here's how I see it:

1. When cross testing, you have to get a minimum number of people into the "rate groups". In my example, I described a scenario in which more is given to the 25 year old than to the younger employee, because when cross testing, you have to give more to a person who is older in order to give them the "equivalent benefit" they will need in order to get into the rate group.

2. In the abusive cases I have seen, the process of giving more to people as they age continues, but only for the limited number of people needed in order to fill up all of the rate groups. This process usually does not go on with people who are 40 or older. Even if it did extend to someone over 40, as long as there are participants who are older than that, you are giving less to those older employees simply because of their age.

3. ADEA, the anti-age discrimination law prohibits discrimination against people who are 40 and older. In my example, I am giving more to the 25 year old than to the younger employee. But the question is: How are the people over 40 being treated? If they're getting less than the people under 40, you've got an age discrimination problem.

4. Code Section 411(b)(2)(A) was added to pick up the anti-age discrimination provisions of ADEA. So, this process not only violates ADEA; it is a disqualifying action too.

Does that help?

[AndyH]

Interesting comments, thank you. I don't often see the types of situations that you are describing, and certainly wouldn't advocate grouping people by age but I suppose that doesn't mean it isn't done.

But if you had classes differentiated by age then certainly that could give rise to what you have described. Maybe that is the key to avoiding what you describe; making the allocation classes cross sectional by age.

[ERISA1]

Interesting comments Andy.

To me, it's all just a matter of proof. That is, if you drafted a Tier for those under 30, and give them more than those in the Tier for over 40, you'd have hands-down proof of age discrimination. I've never seen something as blatant as that.

I do think that alot of contribution categories are drafted in a way that papers over the fact of age discrimination. For example, a category for filing clerks, more often than not, is designed to focus dollars on young people (most employers don't have a special affinity for filing clerks - beyond the fact that they might help hold down contribution costs). The problem for a plaintiff's lawyer is that s/he will have to be able to prove that age was the sole/primary motivating factor in creating this special contribution category.

I believe that the type of plan design described by Randy Staples in the opening querry above is most prone to age abuse. Since the plan document makes every participant a separate category, it is very tempting to provide higher benefits to younger employees - because they will be the cheapest ones to get into the Rate Groups. Still, it comes down to a question of proof. An employer could single out a 25 year old because s/he made a valuable contribution to the business last year. On the other hand, if the 25 year old has no special attributes other than youth. Or, worse yet, if the tpa documents the fact that he recommends selecting the 25 year old because of her youth, I believe a judge or jury (or the EEOC) could easily enough conclude that this plan design was used as a subterfuge for age discrimination.

[AndyH]

I'm a little slow this week I guess. What you are saying then is that a plan that has each person is his/her own group risks becoming disciminatory in operation. That is a fascinating angle. Thanks for that excellent addition to the discussion.

[ERISA1]

Exactly! One category per participant plans can open the door to a world of operational issues.

In addition to the huge risk of engaging in age discrimination, I find the next most dangerous result is that you'll turn a profit sharing plan into a CODA (cash or deferred arrangement, subject to deferral limits under code section 402(g)). For example, what's to prevent two equal partners from taking different levels of profit sharing contribution? If they're partnership, shareholder or employment agreement defines their income as the sum of cash compensation and retirement contribution (as is always the case in partnerships), then any variation in profit sharing contribution is likely to constitute a coda.

There are a slew of other issues; the above two are just the tip of the ice berg. So, while I agree that plan designs like this can save clients money, the tpa who undertakes to administer such plans had better be at the top of their game.