Retructuring & Terms w/ Breaks

[austin3515]

I am restructuring into two component plans, as follows:

1) plan covering everyone getting profit sharing contriubtions, and

2) plan covering those not getting PS due to a last day rule

Is Plan 1 barred from treating anyone in plan 2 as a "term with a break" because restructuring requires that plans pass coverage "as though they were a separate plan."

[12AX7]

I know I should be giving you a cite from 410(b), but when I restructure it's along the lines of Age and/or Service (statutory 410(a) requirements). That could put someone not benefitting in Plan 1 or visa versa.

Maybe you are thinking of the excludable employees for testing purposes?

[Tom Poje]

I'm not even sure what this would accomplish anyway.

those in

2) plan covering those not getting PS due to a last day rule

are 0 already because they receive no ps.

when I look at group 1 these same folks are also treated as includable and not benefiting so just what does that accomplish?

[austin3515]

What a dope...

Forgot to metion that my plan is a 3% SHNEC, and I'm doing this because differing allocation conditions violates my design based safe harbor, and I am therefore restructing into two design based safe harbor plans.

[12AX7]

I'm trying to avoid being dense, but if you have a designed-based safe harbor, how would coverage become an issue?

[austin3515]

DEsign based safe harbor covers 401a4, not 410b.

[Tom Poje]

ok, so they get the 3% SHNEC, which means thet have received a non-elective, so now they have to receive the gateway (if its coming to that)

this actually sounds not like component plans (though I guess the concept is the same) but rather somewhat of whats found under 1.401(a)(4)-2(b)(3) when the plan has 2 'formulas' because its top-heavy. But I've never heard that referred to as component testing.

or put another way, like broadly available testing how many people received at least 3% (which should be 100%) and then how many people received at least whatever

since its a designed based safe harbor, then there really is only a second group

[austin3515]

Tom, you're losing me!

First of all, the plan is integrated with SS at 80% of the wage base, so there is not x-testing or gateway. But there is a SHNEC so we all agree that by desgin based safe harobr is bye bye.

Someone somewhere along the way told me restructuring is why a plan such as I have described does not fail to satisfy (a)(4). Note that this plan would fail rate group testing (at least on allocation rates), because when imputing disparity on this formula the owners rate is slightly higher (i.e., because the 80% formula works out a little better than the straight integrated formula when over 245K), so no one is in the owners rate group.

Of course, now that I write this all down, I'm not sure that restructuring gives me back my design based safe harbor, because I still have two different allocation conditions on two separate formulas..

So maybe this design really is doomed for failure...

(admittedly, I have strayed from my original question, but this new line is much more interesting!)

[12AX7]

I don't see how the design is doomed for failure. Disregarding 410(b) for the moment, a SH/PS design that you are describing exists on most Standardized Plans. Where the PS contribution does have accrual requirements, I can understand that coverage issues may come up, but I'm not sure if that's what you talking about anymore.

[austin3515]

I'm talking about (a)(4) issues... Sounds ridiculous, I know, that a standardized plan might have an (a)(4) problem, and unless my restructuring thing works to make two design based safe harbor plans, I'd say we have a problem

[12AX7]

I hear ya. Take a look at page 11.516 of the 2009 ERISA Outline Book, or the corresponding pages in the 2010 version. The example in the book is similar to yours where the two component groups are:

1) employees who qualify for an allocation of both the SHNEC and the additional NEC

2) employees who qualify for an allocation of only the SHNEC

Going back to your OP, each component plan must satisfy 410(b) and no employee may be in both groups, obviously. I would think that Group 2 in this example would always pass, so you may have trouble with Group 1 depending on how many NHCEs received the NEC.

[austin3515]

Awesome site. Thanks!

Two things:

1) My orioginal question still stands - does the TWB thing still apply under restructurign? I think a literal interpretation is "No" so I'm at a coverage disadvantage, especially if there is high turnover.

2) I can't figure out how the deisgn based safe harbor is preserved by doing the component plans., The two separate formulas continue to have different allocation conditions. But Sal says that ti works, and gosh darn it that's good enough for me, but I'm just not sure WHY it works.

[12AX7]

It seems that Sal did not dissect the allocations further in the example in 2.3.1)a). If I read it correctly, if Plan 1 satisfies coverage, then it also satisfies the designed based SH with respect to the NEC.

[austin3515]

Thats what I read too, it just doesn't seem to add up, since you continue to have different allocation conditions under the two formulas. Unless the point is that you lopped off the portion of the plan that includes the last day rule, but that seems to be an aggressive position. So for example, Sal appears to be taking the position that the portion of the plan covering those who satisfied the allocation conditions can now be treated as not haviong any allocation conditions (consistent with the SHNEC).

[12AX7]

I understand your point, but if you take it further and look at the availability of the rates allocated to HCEs, and it those should fail, the next step would be perhaps cross-testing, but he doesn't imply it would be necessary under those circumstances. Perhaps the lesson learned in all this is not to have last day/1000 hours with these types of plans. If you should fail coverage for Plan 1, then amending the plan may be more cost effective than all the testing alternatives. Just a thought...

[Tom Poje]

for the sake of the argument, lets suppose you have an integrated plan, last day rule

in addition to the profit sharing there is a 3% SHNEC.

the plan alocates 7% profit sharing plus 5.7% in excess of 100% of the TWB.

There is 1 HCE and 10 NHCEs, 3 of who quit so do not receive the profit sharing.

Looking just at the active NHCES and the profit sharing piece, they receive 7% (none are above the wage base)

If I test on an allocation basis and impute disparity, their E-Bar would be 7% plus5.7% = 12.7%

The HCE, because of the way imputing disparity works also will have an E-Bar of 12.7% (Try it, it works)

so ignoring the 3 NHCEs who received 3% only that means 7 of 10 NHCEs have the same e-bar as the HCE. You pass ratio % test on an allocation basis.

so as long as your group of NHCEs who receive safe harbor only is less than 30% of the HCEs and assuming you are integrated at the max, you are guaranteed to pass - even better if you have HCEs who didn't receive the safe harbor.

(If you have more than 30% who failed the last day rule you probably have a partial termination)

[Kevin C]

A lot of this has been discussed before with no clear resolution. Here is one of those discussions.

http://benefitslink.com/boards/index.php?showtopic=46028

[austin3515]

Tom, that's why I referenced the 80% integration scenario, where the EBAR's come out differntly.

[12AX7]

After reading the other thread I see that those who are wiser (than me) have come up with the same split decision that we struggled over yesterday. I would hate to think that I need to further prove that (a)(4) must be satisfied further after the component plans pass coverage. If true, then my fee schedule needs to be adjusted and I could lose a client. I know for certain that some bundled providers are not taking these factors into consideration, but that certainly doesn't make it right even if the client is happy.

[austin3515]

Interesting in that other thread that went around. I like the favorable opinion letter on the standardized document argument which rings very true to me. I also think it directly addresses my "temr with a break problem."

I think gthe bottom line here is that the IRS has clearly taken the position that you should just pretend everything is OK if you can pass coverage by ignoring the SHNEC. And who am I to argue with them that something really is a problem?