Coverage-After Tax and Match

[justatester]

We have a Salary and Hourly plan. The hourly plan has non union employees. As one would think, there are coverage issues since the hourly plan does not have any HCEs in it. The plans do pass coverage using Average Benefits Testing in 2005 and are tested separately for ADP/ACP purposes. They are relying on those results for 2006 and 2007. My question is the Salary plan allows for aftertax contributions and the hourly plan does not. Both plans allow for match. Do I need to worry about the fact that the hourly people can not make after tax deductions?

[ERISAnut]

The hourly individual are not 'benefiting' under 401(m) unless either of the following:

1)They are eligible to make after-tax contributions - (Which none are)

2) They are eligible to receive matching contributions - (Which they may be).

The ONLY employees included in the ACP test (which tests matching and aftertax together) would be those who are 'benefiting' using the criteria above.

So, depending on your circumstances, there may (or may not) be an issue. This is how you would decide.

[Tom Poje]

I am a bit confused, you say there are coverage issues but that the ADP and ACP are tested separately. That implies for coverage that the plans are tested separately, in which case it sounds like there are not really coverage issues since each plan can pass on its own.

as for after-tax, it is not really a coverage issue, though it is a BRF issue 1.401(a)(4)-4(e)(3)(iii)(F)

[ERISAnut]

as for after-tax, it is not really a coverage issue, though it is a BRF issue 1.401(a)(4)-4(e)(3)(iii)(F)

I do not believe it would necessarily be a BRF issue since it is dealing with a provision of a distinct plan. Even if the other plan fails coverage (but has an after-tax provision) and is 'permissively aggregated' with another plan (that doesn't have an after-tax provision); it wouldn't qualify as a BRF issue since this is a condition of the distinct plan provided the classification within itself is reasonable (i.e. salaried).

I am assuming that the salaried plan is failing 410(b) due to a large number of Non-excludable NHCEs who are hourly.

[justatester]

The Hourly and Salary Plan are two separate plans. Since they use ABT to pass coverage, we have completed the ADP/ACP as separate plans. By coverages issues, I mean that they do not pass the ratio test and need to utilize ABT testing. In 2005, they passed, but in 2007 they are not projected to pass which is why they are relying 2005 results.

As far as benefiting, both groups are eligible for the match, but the hourly plan can not make after tax contributions. So for "coverage" both groups are "benefiting" for 401(m). I guess my question is...is there any further testing requirement since the hourly plan does not permit aftertax contributions.

[justatester]

Yes, the hourly plan has no HCEs...the salary plan has all the HCEs. Is there a BRF requirement since they are "separate" plans?

[ERISAnut]

If the plans fail to pass 410(b) as stand-alone plans, and you must 'permissively aggregate' them in order to pass 410(b), then you would be precluded from performing ADP/ACP separately (and must aggregate there as well). You are not allowed to run ADP/ACP on a plan that does not pass 410(b) first.

As for BRF, I think it is a non-issue as after-tax is a part of the plan. The fact that the plan fails to pass 410(b) doesn't create a BRF issue.

[Tom Poje]

If plans are not aggregated then I would agree probably no BRF in regards to the after tax.

I express a concern about using test results from 2 years ago in light of the fact it is indicated the plan is failing in 2007.

the option to use 'prior year results' (at least as far as I understand it) is if there are not significant changes.

I thought this option was primarily for situations in which you have 'a gazillion participants' and if it passed in prior years the IRS is giving a little leeway and saying don't bother testing because it doesn't really matter if you have some minor changes... a plan with a gazillion people that passed coverage at 82% is not going tochange much unless you have a big shift.

ok, I took the trouble to look in the ERSIA outline book under 3 year cycle testing, and it basically says the same thing - if "employer reasonably concludes that there has not been any significant change affecting the outcome of the coverage test performed in prior year"

[Laura Harrington]

If plans are not aggregated then I would agree probably no BRF in regards to the after tax.

I express a concern about using test results from 2 years ago in light of the fact it is indicated the plan is failing in 2007.

the option to use 'prior year results' (at least as far as I understand it) is if there are not significant changes.

I thought this option was primarily for situations in which you have 'a gazillion participants' and if it passed in prior years the IRS is giving a little leeway and saying don't bother testing because it doesn't really matter if you have some minor changes... a plan with a gazillion people that passed coverage at 82% is not going tochange much unless you have a big shift.

ok, I took the trouble to look in the ERSIA outline book under 3 year cycle testing, and it basically says the same thing - if "employer reasonably concludes that there has not been any significant change affecting the outcome of the coverage test performed in prior year"

I agree with Tom. If the plans are not aggregated for coverage you have no BRF issue. However, if you have to aggregate the plans for coverage than you must test the availability of the right to make after-tax contributions.

I was also going to point out the same issue Tom did regarding the 3-year testing cycle. You cannot rely on testing results from two years ago just because you know the plan is going to fail for the current year. That is contrary to the reason the 3-year testing cycle is allowed.

[justatester]

I would agree they are not following the spirit of the "3 Year" rule. We have pointed that out to them but they have decided to go with the 3 year rule. They actually pass ABT for the Statutory group, but fail the "participants who do not meet statutory minimums". They have a HCE in that group. To further complicate things, they have a DB plan recordkept elsewhere.

[ERISAnut]

We have a fundamental disagreement on when BRF comes into play.

Let's assume that instead of after-tax contributions, the provision being question with respect to the two plans were the limit on deferrals. Let's assume the hourly plan (which failed 410(b)) provided a maximum deferral of the 402(g) limit while the hourly plan provided a maximum deferral of 10% of compensation. Would this be subject to BRF?

Better yet, let's assume that the definition of compensation used for the hourly plan's ability to make elective deferrals is Base pay (excluding overtime) while the compensation used for the salaried plan is total compensation. Let's also assume, for argument sake, that the compensation failed the compensation ratio test. Would this be subject to BRF?

I think BRF effectively ends at the plan level. However, if nothing else, this plan must be either permissively aggregated with another plan (or pass both the NDCT and ABT) in order to fly. But, how does such a provision that is uniformly applied over all participants of the particular plan become a BRF issue?

I know there are different schools of thought on this issue, but see our differences of opinion as to where this line is drawn.

[Laura Harrington]

When you permissively aggregate for coverage you no longer have two separate plans for coverage and nondiscrimination testing. They are one plan and the provision is no longer uniformly applied to all participants in "the plan".

This is what makes the differing provisions BRF issues.

[ERISAnut]

Okay. Got it. I had my wires crossed. BRF doesn't end at the plan level, but prohibited transactions rules do. I was actually thinking of a case I had with loans a while back (at least that were my issue was applied when I crossed this bridge). It wasn't BRF, but prohibited transactions.

I stand corrected.

[justatester]

Ok...I thought the purpose of going to the ABT test was to reduce the "ratio" for the coverage test. This would then allow you to not aggregate for all testing. Looking at is this way, the salary plan does not have a BRF issue since all employees are benefiting with match and aftertax. The hourly plan does not have an issue either since all are not benefiting for aftertax, but all are benefiting under the match.

[Laura Harrington]

Ok...I thought the purpose of going to the ABT test was to reduce the "ratio" for the coverage test. This would then allow you to not aggregate for all testing. Looking at is this way, the salary plan does not have a BRF issue since all employees are benefiting with match and aftertax. The hourly plan does not have an issue either since all are not benefiting for aftertax, but all are benefiting under the match.

That is correct. Based on the information you provided, the hourly and salaried plan were not aggregated for coverage so you do not have a BRF issue regarding the after-tax contributions.

I hope you told the client in writing concerning the 3-year rule, and they replied in writing that they wanted to use it anyway. Here is where a liability release may come in handy down the road.

[justatester]

Thank you guys for your input!

Yes, we did get direction in writing to use the 3 year rule and our package going back out to them outlines our concerns. Hopefully that will be enough. I will go back to the letter and add some stronger language.

[BG5150]

How does the hourly plan fail coverage if there are no HCE's?