Plan Design - Non Discrimination

[Gary]

It is clear that a retirement plan or combined plans cannot discriminate in favor of HCEs.

It is also clear that there is an objective numerical test to demonstrate that the plan accruals for a plan year are non discriminatory.

So let's say a company wants to implement a profit sharing plan or the company could perhaps implement a cash balance plan instead. Say the company wants to contribute 20% for some HCE owners and 5% for some other HCE owners. And consequently, the company might then need to provide 20% to a few NHCEs and perhaps 5% to the remainng NHCEs in order to pass the allocation rate ratio test (whether the plan uses the ABT or not).

It would thus seem that the plan would then have to provide some criteria or classification in order to provide one rate of pay to some employees and another rate of pay to others.

This seems a little bit subjective. With that said, I am curious to canvass what types of classifications practitioners use when designing such plans for small employers (i.e. less than 20 non excludable employees)?

Thanks.

[SoCalActuary]

A couple of points to consider:

You discuss the allocation rate test. Usually these are done with several types of test, including the annual accrual and the accrued-to-date test, both with and without permitted disparity. If you pass any one of these tests, you have demonstrated compliance with 401(a)(4) rate-group testing. Older HCE's usually get better results by using the annual accrual test with peritted disparity, provided you can pass the gateway test for combined DB/DC plans.

If you can pass the ABPT, then you get to use the mid-point percentage test for rate group testing. You might also avoid the need to prove an objective business purpose for selecting your groups. Consider providing benefit rates by name in a small cash balance plan or a money purchase plan. For a profit sharing plan, define an allocation rate separately for each employee.

But back to your question:

If you want objective job classes, try work locations, job titles, departments, salaried vs hourly, commissioned vs regular pay, clerical vs technical vs management, etc.

[Gary]

Thanks for you rresponse So Cal.

I'm in San Diego myself.

Anyway, my understanding is that you indicated using specific names for allocations in a cash balance plans, profit sharing plans, etc. was acceptable and permitted.

I presume you consider that approach acceptable for DB plans as well, as long as non discrimination is met.

Assuming you agree with my preceding paragraph, then that technique allows for criteria that I wasn't sure would fly. That is, I thought I might have needed to arrive at some sort of objective-type criteria.

Please confirm that we are on the same page.

Thanks.

[AndyH]

Gary, if you are really interested and have not done much of this work (on DC plans), buy this. It is a few years old at this point, but should not be out of date. I bought it a few years ago and found it very useful.

http://www.cyberisa.com/erisa_docs.htm

[SoCalActuary]

Gary - yes, I believe you understand that benefit and/or contribution rates by individual person can be established in the plan document. This does not prevent a plan from being tax-qualified.

I would warn about any distinction that is not based on an objective criteria, such as job title or location.

Such distinctions could still be discriminatory in the civil-rights sense of the word. For example, you could not use in your document such distinctions as sex, race, religion, national origin or age to define your groups. If you use such criteria or have a high correlation between these characteristics and your benefit formula, you may still be discriminatory.