Compensation and the ABT

[buckaroo]

I have come across a question that I would guess has a relatively easy solution, but I cannot seem get my arms wrapped around it. I have a calendar year 401(k)/PSP. It has only the two sources: 401(k) and profit sharing. The elig and entry date for the two sources is as follows: 401(k) – Age 21/1YOS, entering monthly; PSP – Age 21/1YOS, entering on 1/1/ and 7/1. (At this point, no allocation conds. for the PS.) The plan defines compensation as while a participant in each specific source. The plan excludes a division of employees from all sources. When the ratio test is performed for coverage (for both sources), it fails. (No fail-safe language.) Therefore, we need to run the ABT. My question is which compensation do I use to complete the ABPT? Comp for the entire year? Comp while a ptp in the 401(k) portion? Comp while a ptp in the PS portion?

The example is as follows: Person is hired on 2/1/2007; They are eligible for the 401(k) on 2/1/2008; they are eligible for the PS on 7/1/2008. When the ABPT is run, do I use 1/1/2008—12/31/2008 or 2/1/2008—12/31/2008 or 7/1/2008—12/31/2008. Is it optional? Any help would be greatly appreciated.

[J Simmons]

I'll take a stab as no one else yet has.

IRC § 410(b)(2)©(i) refers to section 414(s) compensation. IRC § 414(s)(1) refers to section 415©(3) compensation. IRC § 415©(3)(A) refers to compensation "for the year"--limitation year, that is (Treas Reg § 1.415©-2)--which is the calendar year unless the plan states otherwise. Treas Reg § 1.415(j)-1(a).

IRC § 414(s)(3) allows, as an alternative to section 415©(3) compensation, a definition as per regulations. Treas Reg § 1.414(s)-1 refers to determination period, obliquely defined as in Treas Reg § 1.414(s)-1(h)(2):

Determination period means a period during which the amount of compensation is measured for use in determining whether the requirements of an applicable provision are satisfied. If no period is provided under the applicable provision for measuring compensation, the determination period is the period for which the applicable provision must be satisfied. The applicable provision may provide additional rules concerning the determination period to be used for satisfying the nondiscrimination requirement in paragraph (d) of this section.

Since your average benefits percentage test must be satisfied on a plan year basis, this reg would suggest the plan year compensation.

[Tom Poje]

well, of course first you would have to follow the terms of the document, and hopefully you have a document that says for purposes of 414(s) comp use any definition that satisfies 414(s).

now for 414(s) you can use comp from date of entry.

but you have 2 different dates of entry, so now what?

I'd go out on a limb and make the follwoing 2 possible guesses:

1.401(a)(4)-9(a) says 2 or more plans that are permissively aggregated as a single plan under 1.410(b)-7(d) [aggregation for ratio % and nondiscrim classification] must also be aggregated for a(4) testing.

since I must use the least stringent eligibility requirements when testing for coverage in aggregated plans, I'd lean toward using whatever comp is available in the least stringent entry date, in this case 2/1.

the other possible alternative would be to calculate the % under one plan (using comp and contrib) from 2/1 and add that to the % based on contrib and comp from the other plan (e.g. from 7/1). this would certainly be the way you would perform the test under 1.410(b)-5(d)(5)(ii) [calculating the avg ben % for plans with different plan years] - e.g. calculate the % seperately for each plan and then aggregate them.