Excluding People By Name

[goldtpa]

A DB uses a Vol Submitter and has never been submitted to the IRS for a LOD. The DB excludes people by name. My understanding is that this is not allowed under 410(b). Is this correct?

[SoCalActuary]

You should consider taking a more advanced training program on non-discrimination rules.

Such provisions are common. But the person excluded is treated as zero benefit level and included in discrimination tests.

[goldtpa]

SoCal, I do need to brush up on this area. However my understanding of Treas. Reg. §1.410(b)-4(b) is that the regulations expressly provide that "An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification."

Has the IRS issued other guidelines that make it acceptable to exclude people by name?

[SoCalActuary]

Reasonable classification is a definition that is only used in the context of the 410 regulations to pass the tests.

If you don't have one, then the consequence is that you don't use the mid-point safe-harbor percentage. That's all.

[Guest Richard Feynman]

SoCalActuary, does this also mean that when excluding by name you must use the 70% test (i.e., not use safe-harbor midpoint percentage) on the rate group tests for 401a4 testing?

[ak2ary]

If your plan passes the ratio percentage test for coverage, it is not required to meet the reasonable classification test which is part of the average benefits test.

In testing rate groups, a rate group can show compliance with 410(b) if it meets the mid pt of the safe and unsafe harbors as long as the plans testing group passes the average benefits percentage test. Rate groups are not required to meet the reasonable classification test nor are the plans surrounding the rate groups required to meet the reasonable classification test. The lowered threshhold (mid pt of safe/unsafe) is dependent on passing only the avg bft PERCENTAGE test, not the whole average benefits test.

[SoCalActuary]

Wish I had more time to give a lesson on this issue. But Rich & goldtpa, the answer is no. You still have access to 410(b)(2) Avg Ben Pct Test, you just don't get to use the mid-point.

This is a subject with some extra layers of complexity, so it needs a proper study beyond the scope of this web post.