Coverage-General Testing

[justatester]

Here is the situation:

Plan makes a Safe Harbor 3% contribution. In addition, they make an additional 4% ps contribution that has a last day/1000 hours requirement. Normally the last day/1000 hours would be tested through coverage but since both ps contributions are tested together that feature is not being tested.

So in practice, you have some participants only receiving a 3% contibution and some receiving the 3% and an additional contribution. So not everyone is getting the same "level" of benefit. Does this require "general" testing.?

[Laura Harrington]

Here is the situation:

Plan makes a Safe Harbor 3% contribution. In addition, they make an additional 4% ps contribution that has a last day/1000 hours requirement. Normally the last day/1000 hours would be tested through coverage but since both ps contributions are tested together that feature is not being tested.

So in practice, you have some participants only receiving a 3% contibution and some receiving the 3% and an additional contribution. So not everyone is getting the same "level" of benefit. Does this require "general" testing.?

Yes. This arrangement does not satisfy the "Multiple Formula Rule" under the 401(a)(4) safe harbor because each formula is not available to the same group of NHCEs on the same terms (e.g. same accrual conditions).

[austin3515]

I disagree...

Here's what you do:

-Restructure the plans into two plans - people who get just the safe harbor (SH Plan) and people who get both (Both Plan).

-Treat those people covered by the SH Plan as not benefitting in the Both Plan. If the Both Plan still satisfies coverage, you're OK.

-Same thing applies to the SH Plan, but of course there are generally not any HCE's in this plan.

Both plans are design based safe harbors and exempt from general testing. Preserving this status is cited as one of the primary reasons for restructuring in the first place. And since many plans now have the 3% SHNEC plus PS with allocation conditions, this is a pretty important thing to be aware of.

[Laura Harrington]

I disagree...

Here's what you do:

-Restructure the plans into two plans - people who get just the safe harbor (SH Plan) and people who get both (Both Plan).

-Treat those people covered by the SH Plan as not benefitting in the Both Plan. If the Both Plan still satisfies coverage, you're OK.

-Same thing applies to the SH Plan, but of course there are generally not any HCE's in this plan.

Both plans are design based safe harbors and exempt from general testing. Preserving this status is cited as one of the primary reasons for restructuring in the first place. And since many plans now have the 3% SHNEC plus PS with allocation conditions, this is a pretty important thing to be aware of.

I understand what you are saying (and we do this all the time in my practice or this exact situation), but in my opinion we are still doing the generaal test because we are showing that each rate group is satisfying coverage.

[austin3515]

Case in point:

a) Owner is 25, and 10 employees are each age 50, so X-Testing does NOT work.

b) Plan is integrated at 80% of the taxable wage base, and the owner makes 100K and the 10 ees makes 50K.

c) 8 of the 10 are eligible for the PS, but 2 are eligible for just the safe harbor.

Question: Does rate group testing pass? The answer is "No" becaue when you impute disparity on this Plan it doesn't give the owner any benefit since he made less than the TWB, yet he is getting a higher rate of contributions.

Yet, because we can restructure these plans into two design based safe harbors, no general testing is needed, and this common plan design is not "doomed."

[justatester]

Thanks for the responses...couple of follow up questions...

When you say restructure the plan, do you mean just on paper or actually separate them into two separate trusts? Do I just run separate coverage tests by each contribution?

[austin3515]

Restructuring is a testing option similiar in nature to testin otherwise excludables differently, so yes it's just "on paper" and exclusively for testing.

You "pretend" you have two separate plans, and test both plans for coverage accordingly.

[justatester]

Thank You! That's what I figured, but my brain is not working very well this morning.

[Laura Harrington]

Case in point:

a) Owner is 25, and 10 employees are each age 50, so X-Testing does NOT work.

b) Plan is integrated at 80% of the taxable wage base, and the owner makes 100K and the 10 ees makes 50K.

c) 8 of the 10 are eligible for the PS, but 2 are eligible for just the safe harbor.

Question: Does rate group testing pass? The answer is "No" becaue when you impute disparity on this Plan it doesn't give the owner any benefit since he made less than the TWB, yet he is getting a higher rate of contributions.

Yet, because we can restructure these plans into two design based safe harbors, no general testing is needed, and this common plan design is not "doomed."

I have been thinking about this all night and it seems I was looking at restructing in a vacuum and missing this application of it. So thank you for enlightening me!

Unfortunately, we deal with a lot of small plans where the restructured plans couldn't pass coverage so we still have to do general testing on those plans.

Have a great day!

[Kevin C]

Laura,

What kind of documents do those small plans use? If they use a NS prototype or VS document and have reliance on the opinion letter, the letter will reference when the plan can rely on the opinion letter with respect to 401(a)(4). Our VS document's opinion letter says "Employers that elect a safe harbor allocation formula and a safe harbor compensation definition can also rely on an advisory letter with respect to the nondiscriminatory amounts requirement under Code section 401(a)(4)."

If they use a standardized prototype, the document requires the use of 401(a)(4) safe harbor allocations. Our standardized prototype allows pairing a PS contribution using 500 hours or last day with a 3% SH.

If a NS prototype or VS document uses a 414(s) safe harbor compensation definition and an allocation formula allowed in a standardized prototype, I read the opinion letter as saying the plan is 401(a)(4) safe harbor.