component plans

[Pension Nerd]

Help!

I have a plan that has to be cross tested.

The rate group test is not passing on a whole group basis. The prior vendor broke the plan into component plans:

Group A

HCEs 97

NHCEs 995

Group B

HCEs 11

NHCEs 15

The rate group testing passes in Group B on a contributions basis, because all of the employees in Group B have the highest allocation rate allowed by the plan. Group A passes on a benefits basis.

However, I thought that in order to be able to break a plan into component plans, 410(b) must be satisfied for each component as if they are a separate plan.

I interpreted this to mean that Group B would not satisfy 410(b) because the ratio % would be:

NHCEs = 15/1010

HCEs = 11/108

14.58%

I have never broken a plan into components for cross testing, so I questioned the prior recordkeeper on how Group B could possible satisfy 410(b). They responded that the coverage is 100% because the components are treated as completely separate plans.

Am I crazy? (there are probably several non pension related reasons I am crazy)...but from a pensions perspective, is it possible the coverage can be 100% for Group B?

Thanks!

[ak2ary]

They are treated as completely separate plans, but not as completely separate employers!

So, if the only "plan" the employer had was for Group B, would it meet coverage??? Your calculation indicates that it would not

Assuming that's a best case calculation, I agree with your assessment. (Of course if 900 of the Group A NHCEs are otherwise excludable the answer might be different)

[Tom Poje]

if I understand component plan testing correctly you have the following:

step 1 would be to determine if the 'plan' as a whole passes coverage.

as you indicated, if you tried to test the 'plans' as seperate, you would fail coverage.

so you have aggregated the plans and all benefit (100%) so that is not a problem for coverage.

based on what you indicated, plan will not pass if all employees are tested on either a contribution or accrual basis.

so, now you want to do some component testing. there is no requirement you split people between A and B.

you can put people into different groups, as long as each employee is in one and only one group.

for component testing, each group must pass 410b (obviously wont work if you only use group B) and 401(a)(4)

however, it might be possible to take 5 or 6 'old' hces from group b, and test them with group A instead. (e.g. a component plan)

that would almost double your percentage of 14.58 because you cut the hce group almost in half. now you have a fighting chance if you can pass a(4)

again, that is if I understand the component (or restructuring) rules properly.

[Pension Nerd]

Thanks for the responses!

I feel a little saner now!

[ak2ary]

Tom..

On your point, if you simply double or triple the coverage percentage of the second component plan by adding some of the older Group A NHCEs or subtracting some of the older Group B HCEs, you will likely still fail. The requirement for component plans is that they must pass coverage as if they were stand alone plans. Thus, if you are not going to pass the ratio percentage test, you must pass all three parts of the Average Benefits Test, including the reasonable classification test...so you can't just grab a few people...you need to grab enough to get to 70% or you have to make sure that you grab enough people to pass the nondiscriminatory classification test and the people you grab have characteristics that will cause the group covered under the component plan to be a reasonable business classification.

[Mike Preston]

As everybody else has indicated, the prior service provider does not understand how component plans operate, or you have misinterpreted what they said. In all likelihood, component plans never pass the ABT. The third prong of that test - the reasonable group test - is almost never satisfied.

With the numbers you have cited, the number of NHCE's needed in the second component plan, along with the 11 HCE's, is either 72 or 73 (depending on how one rounds).

But you would then need to pass the APBT in order to arrange your rate groups such that the passing percentage was roughly 23.5%, rather than 70%. Does your plan pass the ABPT?

If not, then instead of merely needing 72 or 73 NHCE's in plan 2, you would need 72 or 73 NHCE's in each rate group. That is a tougher row to hoe and you would most likely need a few hundred of the NHCE's, not just 72 or 73.

Luckily, you can cherry pick.

I would be surprised if the plan actually failed non-discrimination, such is the nature of restructuring.

[Pension Nerd]

Mike,

I am pretty certain I did not misunderstand the prior recordkeeper's response to me. They very clearly told me that the coverage for Group B would be 100% since each component would be treated as a separate plan and you would only have to look at those covered within that separate plan (maybe they are confusing the word "plan" with "employer"....

They told me their authority for this was Treas. Reg. 401(a)(4)-9...when I checked the reg, it wasn't saying to me what I guess it was saying to them...

Anyhoo...

I have a couple of questions:

What is the reasonable group test (the 3rd prong you mentioned)?

If I was able to find 72 or 73 NHCEs who were all receiving the highest allocation rate, would the ABPT still be needed? I am a little confused about that part.

Your final comment was you would be surprised if the plan actually failed...I have tried everything under the sun with this one and am not having any luck, so I'm wondering why you would be surprised if it actually failed? Maybe I can get it to pass with any suggestion you might offer...

Thanks!

[Mike Preston]

If you didn't misunderstand them, then they are asleep at the wheel. Silly example: 1000 life plan, 100 HCE's. Put 100 of the HCE's in with the 1 NHCE that has the highest benefit you satisfy the rules because you have 100% coverage? Boy, talk about aggressive!

The reasonable classification test is defined in 1.410(b)-4(b).

If you have 72 or 73 receiving the highest percentage, then if that group were tested on contributions you would have 73/1010 NHCE's (7.13%) and 11/108 HCE's (10.19%) = 69.97%. OK, maybe you need 74. But you wouldn't need the average benefit test in any way, since your **plan** (remove: "rate group") would satisfy the 70% test.

I've never seen a large plan with "normal" benefits not pass. If the plan has a "plan within a plan", such as a plan intended to provide certain benefits just to selected management employees, then of course the test can be failed. But usually restructuring works. As far as suggestions, just to run more tests. Accrued to date with and without permitted disparity. Different salary averaging (3 years, 4 years....10 years).

The basic methodology is to put each HCE in their own restructured plan. What you want to find is either 7 (if ABT fails) or 3 (if ABT passes) NHCE's that exceed the testing threshold for the HCE under some test, any test. Assuming each HCE is supported in that fashion, now you aggregate all the HCE's from each respective test (as you did in the primary example when you put all the HCE's tested on benefits in one plan and all the HCE's tested on contributions in another - this is just an extrapolation of that methodology).

At that point you will probably have a whole bunchload of NHCE's that are either in no plan of any HCE or, are in a plan with an HCE and that plan has more than the necessary number of NHCE's. All of those people are wild cards that can be sprinkled amongst the restructured plans until they satisfy the 70% test.

Done.

[Tom Poje]

so I think we agree that the plan in question might pass testing, but not necessarily for the reason cited by prior administrator (whose reason appears to be wrong)

I am not sure on the comment you must pass 'reasonable classification' when splitting into component plans.

1.401(a)(4)-9©(2) says you can select the group of employees used for THIS purpose in ANY manner, and the composition of the group MAY be changed from plan year to plan year.

In addition, 1.401(a)(4)-2©(3)(ii) says a plan passes nondicrimin classification test (including reasonable classification) if and only if you pass the.... midpoint or ratio % test.

my understanding, at least from the talks I have attended, there really isn't a 'reasonable classifcation test' once you get to the a(4) portion of testing.

[Mike Preston]

so I think we agree that the plan in question might pass testing, but not necessarily for the reason cited by prior administrator (whose reason appears to be wrong)

I am not sure on the comment you must pass 'reasonable classification' when splitting into component plans.

....

my understanding, at least from the talks I have attended, there really isn't a 'reasonable classifcation test' once you get to the a(4) portion of testing.

No question about it: it is not *necessary* to pass the reasonable classification test. But it sure makes passing 410(b) for the restructured component plans much easier!

Agreed that once one gets to the a4 portion of the test, the reasonable classification portion of the test is irrelevant. At that point, it is purely a numeric test. If "greater than 70%", then you may use the lowered threshold for rate group testing. I misspoke above when I used "rate group". I should have used "plan". I have edited the post. Note, however, that I was talking about a plan that had precisely one rate group and everybody in the plan was also in the rate group. At that point, you can technically use either expression (plan or rate group).

Tom, I am 99.9999% confident that you and I interpret the rules the same way.

[Pension Nerd]

Tom & Mike,

Thank you both for your input!

You are correct, the prior recordkeeper was totally asleep at the wheel. In addition to breaking out into component groups and saying that each one passed at 100%, they also imputed disparity on the non elective contribution (which was used to satisfy the safe harbor for the ADP test....no can do...they did ultimately agree that was incorrect)...

Thanks again...you two are my heroes!

[AndyH]

It is clear to me that this prior "vendor" needs to have his sausage sandwich grilling license revoked and go back to selling lemonade.

[Blinky the 3-eyed Fish]

I think you can point out the absurdity of the prior TPA's position to them with a simple example. They divided the plan into 2 components with HCE's and NHCE's and considered them separately. Instead why didn't they divide the components with all HCE's in one and all NHCE's in the other. That would pass under their line of thinking automatically every time.

Then why wouldn't they do that for all their plans. Wow, now every single plan has no possibility of being discriminatory. Those long (a)(4) regs are just a silly waste of time I suppose. Freedom for all plans is here because this TPA has found the perfect solution!

Ridiculous.

[Mike Preston]

What an absurd example. Everybody knows you would have to have one NHCE in the HCE plan to make it viable.