401(a)(4) testing

[John Feldt ERPA CPC QPA]

I have received a comment from another practitioner that has caused me to question the use of deferrals in the ebars (when they get counted as part of the ebar). I believe we are doing this correctly, but I'd appreciate any comments.

A client has a DB plan and a DC plan. The both cover the same people, passing coverage by themselves. Neither plan provides uniform benefits, and to really lower the NHCE cost, they are tested together for 401(a)(4). The DC plan is a volume submitter plan and has the special gateway language as provided for in 1.401(a)(4)-9(b)(2)(v)(D).

For 401(a)(4) testing, my understanding is that first we attempt to pass using the ratio percentage test for each HCE rate group (I believe that the ebars for determining each employee's rate is, at this point, excluding employee deferrals)?

If that does not pass, then we proceed to do an average benefits test. Before we can get down to the test where we use the mid-point percentage, we must pass a 70% average benefits test - and that test is where the ebars include all employee deferrals. If this passes (70% or above), then we proceed to test each HCE rate group against the mid-point percentage.

So far, do these steps sound correct?

When we now test each HCE group against the mid-point percentage, which e-bar is used now: is it (A) the ebar that is calculated without deferrals included? or (B) the ebar as calculated with deferrals included? I had thought it was (A)...

[Jim Chad]

When testing each rate group against the mid point ( sometimes called the nondiscriminatory classification test) you should use A, Without deferrals.

When testing 401(a)(4) the only place you would use deferrals is in the Average Benefits Percentage Test. In the Average Benefits Percentage test you would use all annual additions.