service weighted allocation and the gateway test

[Santo Gold]

A 401(k) plan has a non-elective component in which the employer makes a 1% of pay contribution to all participants with 10 or more years of service. The result is that out of 250+ plan participants, about 80 receive this contribution, with a mixture of about 30 HCEs and 50 NHCEs getting the contribution. Of the remaining 170 participants who do not get it, 25 are HCEs, the rest are NHCEs. I fail 410(b) but still pass 401(a)(4).

But, because I have NHCEs getting $0.00 non-elective, it would appear that I do not pass the 1/3 gateway allocation mark since I have NHCE's getting 0.00% and HCEs getting 1.00%. Is there an exception for this type of allocation method, which is uniform after so many years of service?

Thanks

[Tom Poje]

I will give you extra bonus points for supplying sufficient information, but the logic or premise or whatever falls apart - so at that point you join the ranks of so many.

lets look at the facts:

50 NHCE benefitting / 195 total NHCE = 25.6%

30 HCEs benefitting / 55 total HCEs = 54.5%

ratio % = 46.9%

conclusion: fail 410(b)

response : no, that only fails the ratio % test. you might still pass avg ben test.

avg ben test:

NHCE concentration % 195 / 250 = 78%

safe harbor % is then 36.5%

therefore, since the ratio % 46.9 > 36.5% plan pass nondiscrim classification

so now you need to find out if plan can pass avg ben % test.

you could test on an allocations basis and impute disparity. this could pass and therefore you wouldn't even get to the point of having to worry about the gateway.

assume that fails, so you want to cross test the avg ben % test.

who has to receive the gateway? only those who recevived an nonelective contribution. so your conclusion you fail 1/3 test is incorrect since some ees are at 0. those ees dont come into play. all others received the same %, so you pass the gateway and can test on a cross tested basis.

[austin3515]

That was awesome.

[Mike Preston]

It is actually incorrect for a different reason. One may use the ABPT without being subject to the gateway at all.

However, is anybody else concerned that an allocation only to those who satisfy 10 YOS is a defacto eligibility requirement of 10 YOS? Gee, and I thought 2 years was the max.

[SoCalActuary]

The original post noted that this was a component of the 401(k) plan.

Are there any other employer contributions?

If so, then the 10 year requirement does not bother me.

[Santo Gold]

Tom: Thanks for the bonus points and the great explanation. Very helpful

Mike: When you said that "it is incorrect for a different reason" were you referring to the initial post that was incorrect or to Tom's response?

There are matching contributions available to everyone after 1 YOS, but other than that, there are no other employer contributions, just the 1% after 10 YOS.

[Mike Preston]

Tom: Thanks for the bonus points and the great explanation. Very helpful

Mike: When you said that "it is incorrect for a different reason" were you referring to the initial post that was incorrect or to Tom's response?

There are matching contributions available to everyone after 1 YOS, but other than that, there are no other employer contributions, just the 1% after 10 YOS.

Both to the extent that they imply usage of crosstesting in the ABPT presents a gateway issue of any kind. It does not.

[Tom Poje]

Mike:

you would agree I can set a plan up with classes and name those classes however I want.

so, net effect is that you are saying this could be deemed 'unreasonable' (because you set up a 10 yr wait for ps) and therefore I can not use the avg ben test to pass coverage because I fail one of the requirements to pass nondiscrim classification. hmmmm. I'm not 100% sure on that, but you never know with the IRS.

[Tom Poje]

I should have added the following to the initial response, but I got sidetracked or overfocused on the comment about

"I do not pass the 1/3 gateway allocation mark since I have NHCE's getting 0.00% and HCEs getting 1.00%'

this plan would also meet the 'broadly available test' since the ratio % is > than the safe harbor %. I haven't seen that before in an actual real life situation. therefore, no minimum allocation gateway would be needed.

(I have created such an animal as an example, but gee whiz, you threw me for a loop with an actual case.

must be slipping in my old age.

[Tom Poje]

I had to stop and look up the regs just so I had the cites correct.

I think what Mike is referring to would be the following:

plan is going to test on an allocations basis.

however it runs the average benefits % test on an accrual basis.

The ERISA Outline Book says that 1.410(b)-5(d)(5)(i) which explains the manner in which benefit percentages are calculated for the ABR test does not cross reference the gateway requirement under

1.401(a)(4)-8(b)(1)

I am not 100% sure on that.

the regs (first sentence of 1.410(b)-5(d)(5)(i)) says

...the employee benefit percentage for a testing period is the rate that would be determined for that employee for purposes of applying the general test for nondiscrim in...1.401(a)(4)-8

so, I am simply unclear how to read that (though maybe it was answered in a Q and A somewhere).

certainly the gateway rules are found in 1.401(a)(4)-8(b)(1), but the rate determination is found in 1.401(a)(4)-8(b)(2)

[rcline46]

On Mike's question - I think this revolves around the answer to the same question posed differently.

If a class of employees otherwise eligible for the plan receives no contribution, is this the same as if that class of employees were excluded from the plan? If this answer is yes, and the class is determined on service, and the service exceeds 2 years, is this a violation of 410(a) (I think it is (a) here)?

[Mike Preston]

Mike:

you would agree I can set a plan up with classes and name those classes however I want.

so, net effect is that you are saying this could be deemed 'unreasonable' (because you set up a 10 yr wait for ps) and therefore I can not use the avg ben test to pass coverage because I fail one of the requirements to pass nondiscrim classification. hmmmm. I'm not 100% sure on that, but you never know with the IRS.

You are reading too much into my response. Forget the fact that this plan has a questionable grouping as to service. Assume that there was a PS contribution being allocated to all folks in the plan with 1 YOS. Assume it was 3% of pay for some folks and 10% for other folks. ("folks" = both NHCE's and HCE's) Clearly does not satisfy gateway. Passes 410(b) with flying colors (everybody benefits).

Can we crosstest the ABPT?

I will demonstrate compliance with 401(a)(4) later, so ignore that for now.

Yes, say I.

What say you?

What did your message say?

[Mike Preston]

I think what Mike is referring to would be the following:

plan is going to test on an allocations basis.

Hint: maybe even with restructuring!

however it runs the average benefits % test on an accrual basis.

The ERISA Outline Book says that 1.410(b)-5(d)(5)(i) which explains the manner in which benefit percentages are calculated for the ABR test does not cross reference the gateway requirement under

1.401(a)(4)-8(b)(1)

I am not 100% sure on that.

Bingo! Believe it. Embrace it. Celebrate it.

[Mike Preston]

On Mike's question - I think this revolves around the answer to the same question posed differently.

If a class of employees otherwise eligible for the plan receives no contribution, is this the same as if that class of employees were excluded from the plan? If this answer is yes, and the class is determined on service, and the service exceeds 2 years, is this a violation of 410(a) (I think it is (a) here)?

Indeed.I don’t know how it would interpreted any other way by the Service.

[AndyH]

This is confusing to us DENSA Society members.

Me thinks there are two points here:

1. This looks like a 410(a) violation. That gets my vote.

2. Gateways are irrelevant to this discussion. That also gets my vote.

Do not pass go.

[Tom Poje]

I did find the Q and A I was looking for at

http://www.abanet.org/jceb/2002/qa02irs.pdf

6. §401(a)(4) – New Comparability Regulations

Do the new comparability regulations apply for purposes of the average benefits percentage test?

Assume an employer sponsors both a defined benefit and defined contribution plan, each of

which is tested for coverage and nondiscrimination separately, but uses the average benefits test

for demonstrating compliance with the coverage requirements for one or both plans. Do the new

comparability regulations affect the employer’s ability to do the average benefits percentage test

on a benefits basis?

Proposed response: The new comparability regulations do apply for purposes of the average

benefits percentage test, but won’t restrict the employer’s ability to do the test on a benefits basis

in the situation described. Treas. Reg. 1.410(b)-5(d)(5) indicates that the employee benefit

percentage for the average benefits percentage test is “the rate that would be determined for that

employee for purposes of applying the general test for nondiscrimination in Treas. Reg.

1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8 or 1.401(a)(4)-9, if all the plans in the testing group

were aggregated for purposes of §410(b).” Since the new comparability regulation provisions in

Treas. Reg. 1.401(a)(4)-8 and 1.401(a)(4)-9 affect the rate that would be determined for the

general nondiscrimination test, those provisions apply for purposes of the average benefits

percentage test.

However, in the case of an employer sponsoring a defined benefit plan and a defined contribution

plan that are tested separately under the coverage and nondiscrimination regulations, except that

benefits under both plans are considered for purposes of the average benefits percentage test, the

defined contribution plan will satisfy Treas. Reg. 1.401(a)(4)-9(b)(2)(v)©, the “broadly

available separate plan” threshold. The average benefits percentage test in this situation can be

determined on a benefits basis.

IRS response: The IRS agrees with the proposed response.

[MWeddell]

Here's an excerpt from the 2003 EA gray book that contradicts the Q&A that Tom Poje quotes above. In practice, one might get to the same result, but it sure is easier to decipher this Q&A:

2003 - 20

Nondiscrimination: New Comparability Regulations

Do the new comparability regulations apply for purposes of the average benefits percentage test? Assume an employer sponsors both a defined benefit and defined contribution plan, each of which is tested for coverage and nondiscrimination separately, but uses the average benefits test for demonstrating compliance with the coverage requirements for one or both plans. Do the new comparability regulations affect the employer’s ability to do the average benefits percentage test on a benefits basis?

RESPONSE

No. Although Treas. Reg. 1.410(b)-5(d)(5) may be interpreted to suggest that the new comparability regulations do apply for purposes of the average benefits percentage test, the preamble to the final new comparability regulations clearly states, "These rules do not apply ...to the situation in which plans are aggregated solely for purposes of satisfying the average benefit percentage test of section 1.410(b)-5."

[Tom Poje]

I thought it said the same thing. to me it sounds like it says

''in certain situations such as aggregating db/dc plans only for the avg ben % test dont worry about the cross testing rule pertaining to gateway because you are going to test the plans separately for all other purposes (e.g. not cross test)

now, by implication does that mean you have to consider the gateway for other purposes.

[Mike Preston]

now, by implication does that mean you have to consider the gateway for other purposes.

OK, I'll bite. What do you have in mind here, Tom?

[Tom Poje]

simply that the example used in the Q and A dealt with a specific situation. a db/dc combo that was otherwise tested separately. (hence the IRS response ....in certain situations...

so does that mean in other situations, lets say you only have a dc plan. are you allowed to do the avg ben % test on an accrual basis without the gateway

(besides Mike, I really need help with a db min distrib question I posted in the distribution section.

since the Wolverines have apparently played themselves out of the big dance, Ifigured you would have more time for pension stuff.)

[Mike Preston]

so does that mean in other situations, lets say you only have a dc plan. are you allowed to do the avg ben % test on an accrual basis without the gateway

Yes.