testing

[Guest lskin]

Hello,

Small business has 10 employees who are over 21 and work full time. Two of the employees are HCE and 8 are non-highly compensation. Plan is going to allow 6 of the NHC employees to participate in the 401k and only 1 of the highly compensated. This would seem to pass the ratio percentage am I right to say it wouldn't pass the average benefits test since there is no distinct class of employees?

[Guest SWH]

Why worry with avg ben if passing ratio?

[Guest lskin]

I am not worried . I just want to make sure that the ratio test can be done without having to classify employees. The average benefits makes you classify employees (example hourly vs salaried).

[Guest lskin]

Can anyone tell me if I am right about the above?

[JAY21]

You're right that you won't have the "reasonable classification" issue associated with the ABT to worry about in the plan document, though you will need some language to define which employees are being excluded, though this language does not need to be "reasonable" in light of the fact you are passing on a ratio/percentage test basis.

[rcline46]

The average benefits test only measures HCEs against NHCEs, there is no need for any classifications.

[Guest lskin]

So if we create a nonstandardized plan and the two NHCE that we don't permit to be in the plan are part time but work more than 1000 hours the plan would be okay right?

[Mike Preston]

So if we create a nonstandardized plan and the two NHCE that we don't permit to be in the plan are part time but work more than 1000 hours the plan would be okay right?

Boy, talk about mixing issues. It sounds like you want confirmation that they above satisfies 410(b). Sure it does. But it would fail 410(a). See the example in the regulations.

And to answer your prior question, whether the plan has the average benefits test available to it for 410(b) (which, for the life of me, I don't understand why it would need it), it would depend on the provisions of the plan as to how the exclusion of the HCE and the 2 NHCE's was accomplished. Excluded by name? No way. Excluded by way of the description above, sure, but remember, that would fail 410(a) so it isn't much of a victory.

If you want the average benefits test available, you need to ensure that the plan document provision which operates to exclude the ineligible participants does so on the basis of what the IRS calls a "reasonable classification".

[Guest lskin]

I am confused (obviously) . Why would it not pass 410(a)? Is it because it is excluding part time employees. In non-standardized plans can you not exclude part time employees?

[Jim Norman]

I am confused (obviously) . Why would it not pass 410(a)? Is it because it is excluding part time employees. In non-standardized plans can you not exclude part time employees?

No, you cannot. Plans cannot have a service-based exclusion other than the "Year of Service" as permitted in 410(a).