BRF Testing

[justatester]

A plan I am working on has a service based match. 0-5 years 33 1/3% up to 6%, 5-10 75% up to 6%, 10+ years 116.67%.

The plan spun out of a much larger plan effective 1/1/11. Their projected ACP test is HCEs 6.11% vs 2.26%. So a pretty large ACP failure. Since it is a service based match, BRF is also going to be required. They will not pass the 70% ratio, but will pass using the "safe harbor ratios"...which I believe you then need to look at effective availability and facts and circumstances. I realize this portion is not mathematically....but any guidance on what would be reasonable? Does the fact that the ACP test fails need to be considered or when its corrected no longer a factor? The HCE population has 162 employees, all but 7 receive the top 2 tiers. In fact 137 receive the top tier. If they use the safe harbor ratios, can they still rely on testing every 3 years? It just seems to favor the HCEs.

Any thoughts/concerns would be greatly appreciated!

[Tom Poje]

under the definition of effective availabilty (1.401(a)(4)-4© it says based on all the relevant facts and circumstances the group of employees to whom a BRF is effectively available must not substantially favor HCEs.

your description certainly sounds like it substantially favors the HCEs.

that being said, since there is no mathematical test, I suppose you could use the facts and circumstances from the coverage rules 1.410(b)-4©(3) as a guideline. for instance only a few NHCEs bodies were needed to pass ratio %, or if the avg ben % test was well over 70% , then possibly things pass the smell test. but it still is going to be a judgement call. I think you would have to look at "Why are there not long term NHCEs if there are long term HCEs?" and that's hard to give any proof one way or the other. Once had a plan audited and the IRS agent said there is over 20% turnover. why don't you consider that a partial termination. I pointed out this was a plan in the computer industry and the agent actually was surprised the turnover wasn't even higher, and let it go at that.

I don't think the fact the plan fails should be considered, because all that happens is the HCEs get a refund, so they gain either way.

I would be very wary of 3 year testing when a plan fails. the rule is not there to say "I only need to correct once every three years"