average benefit percentage test and cross-testing

[Guest tschepp]

Is a DC plan required to meet the cross-testing gateway requirements in order to calculate the average benefit percentage test on a benefits basis? The question has been asked a couple of times in this forum and the answer is believed to be no.

In the regulations, it is clear that if there are DB plans in the mix and the optional rule under 1.410(b)-5(e)(3) is used for the ABP test (include DC plans only), the testing must be done on a contributions basis. However, if there are no DB plans, it seems to be less clear. The IRS has informally said the gateway requirements apply (see Joint Committee on Employee Benefits Q&A with the IRS and US Dept of Treasury based on a meeting with staff May 11, 2002, Q&A 6). Therefore, I am interesting in hearing how others have concluded that the gateway requirements do not apply.

Thanks

[Mike Preston]

"believed"? I think you'll find a number of Q&A's which indicate that the answer is "no."

I'll let others comment on how the ABA chooses to word its questions and proposed responses.

[Tom Poje]

there are 2 major tests that are run:

coverage and nondiscrimination

coverage rules are found in 1.410b and the average benefits percentage test rules are found in 1.410(b)-5 (no mention of gateway under the coverage rules). the avg ben % test if the same for coverage and for nondiscrim.

nondiscrim rules are found in 1.401(a)(4) and the gateway rules are found there (1.401a)(4)-8. therefore the gateway only applies when performing nondiscrimination testing. (Thus if a plan is not cross tested for nondiscrim testing you are permitted to use accrual testing in determing the avg ben % test.

The IRS officials basically summed it up the same way...

This question was asked at the 2009 ASPPA Annual Conference.

Based on the facts below, does the profit sharing allocation have to

meet the gateway requirements of the final comparability

regulations? A profit sharing contribution is allocated to a select

group of employees using an integrated points allocation formula

that requires a general nondiscrimination test under IRC §401(a)(4).

The rates used in the rate group test were calculated using

contribution rates, and the ratio percentages of all rate groups met

the nondiscriminatory classification percentage.

The average benefit percentage test did not pass using contribution

rates, but did pass when tested using equivalent benefit accrual

rates.

Do the gateway requirements apply to this allocation because the

average benefit percentage test was done based on equivalent

benefit accrual rates?

No. There is no gateway requirement for a general tested plan under Treas. Reg.

§1.410(b)-5(d)(5), unless cross-testing is used to determine the rate group testing.

The gateway rules are in §1.401(a)(4)-8(b)(1)(I).