Can we use the Average Benefits Test?

[Guest CharlieLaur]

New Comparability Plan has 1000-hour & last-day requirements for a contribution allocation.

For 2004, plan fails the IRC 410(b) ratio percentage test due to the fact that only 9 out of 13 non-highly compensated employees are entitled to an allocation -- the other four NHCE's are terminated participants with more than 1000 hours.

Can this plan use the Average Benefits Test to pass coverage?

The first part of the ABT is the reasonable classification test.

Is "not employed on the last day of the plan year" a reasonable classification for this purpose?

I have found IRS Q&A's from two past ASPPA annual conferences that indicate that the answer is both yes and no -- unfortunately, the most recent answer (from 2001) was no.

Does anyone have any more-recent documentation on this question?

Does anyone use the ABT is situations such as this?

Thanks!

[rcline46]

Charlie, first look to your document. You may have fail-safe language built in.

We specifically REMOVE the fail safe for 410(b), but you document may have it, even in a new comp plan.

Afer that little problem you are on your own. If you have excluded people by name, that is not a reasonable classification and you cannot use the test. In this case the people are not named out and absent anything other than an opinion, I do not feel this violates a 'business reason'.

Others may feel differently.

[Tom Poje]

one has to remember that answers provided at ASPPAs Q & A (as well as other meetings) all carry the disclaimer that they are opinions and possibly might not represent the actual treasury position.

In this case, they have held one position for a number of years and now seem to hold another position.

I have some old notes (1999) from PIX which holds that there are those that hold one view and those that hold the other view. And that was before the IRS seemed to have changed their position. so no hope there.

I haven;t seen anything recent on the IRS position.

At the 2003 Cross tested plan specialty workshop sponsored by SunGard Corbel, the following answer, while not directly addressing your question was provided

"The 'last day' and '1000 hour' conditions are nondiscriminatory, but the plan must first pass coverage, treating as not benefiting any employee who does not receive an allocation because of failure to satisfy allocation conditions. 1.401(a0(4)-2(b)(4)(iii).

I am of the opinion that if a last day requirement or 1000 hour condition are, of themselves nondiscriminatory, then you have a basis for saying they form a reasonable classification. Someone on PIX many years ago said something like "Is it a reasonable business criteria to expect you to be employed on the last day to receive a contribution for the plan year?"

Now, the actual reg (1.410(b)-4(b)) refers to it being a facts and circumstances situation. for instance, if it was apparent that the 4 terminated people in your case were let go on Dec 30 to avoid making the contribution then I think you have an argument for failing reasonable classification. proving that may be hard one way or the other, but that is what facts and circumstances is all about.

was that answer wishy washy and long winded enough?

[Guest CharlieLaur]

Thanks for the quick responses!

Our prototype defined contribution plan has fail-safe wording which kicks-in if you fail the ratio percentage test. However, our volume submitter plan has "fail-safe" wording which only kicks-in if you are unable to pass 410(b) -- no restriction on how you pass.

The irony of this is that, if the plan could use the average benefits test and pass 410(b), it could be argued that we are not following the terms of our plan document by giving contributions to the terminated participants. This would probably never come up but it is a charming little touch of irony.

Not only were the four employees not fired by the employer at the same time, at least a couple of them are now working in competition with our client -- this would certainly seem to make it "reasonable" for him to not want to give them contributions.

I would enjoy this business a lot more if there were more definite answers to questions like this even if I knew that my clients might not like some of the answers.

Thanks again!

[Tom Poje]

ah, I know a number of years ago Corbel (and I am sure other documents) had fail safe language that kicked in if you failed coverage. the IRS realized the error and said no, it is suppose to kick if you fail ratio-percentage. In other words, if you have fail safe you never get to the avg ben test -or at least that is the way it is supposed to work. I know Corbel corrected their language. I had wondered why some documents were more lenient than others in regards to this and it was due to an oversight.

[AndyH]

Good comments here, IMHO.

This question qualifies as one of the top 50 reasons why we need Mike Preston back.

But, Charlie, all they gotta do is pass the flat tax and nobody will have reason to ask or answer any of these questions.

And FWIW, my vote is yes, it satisfies the precondition for the ABPT.