coverage

[Gary]

a company has 150 employees.

30 are HCEs

120 are NHCEs

They are creating a new DB plan and would like to cover the 15 owner HCEs and 35 NHCEs for a total of 50 to pass 401a26

They want to essentially include certain employees, such as lower paid and/or younger ones.

Any ideas as to ways in which the plan can be drafted to choose the various employees desired?

There are dozens of job classifications/ job titles.

I suppose we can name the job titles of every group desired to be in the plan and as close as possible arrive at the desired 50 employees.

thanks

[Tom Poje]

for coverage you would have

NHCE benefitting 35 /120 = 29.167%

HCE benefitting = 15 /30 = 50%

ratio %

29.167 / 50% = 58.33% well short of the required 70% for the ratio % test.

[rcline46]

Oh wonderful - a carve out, standalone DB plan. Certainly legal. Hopefully you charge enough to keep the carve out running because of the extra work.

And yes, you can pick whatever classifications you want.

[Gary]

the plan of course is tested with a 401k profit sharing plan, but yes it requires including a targeted group. thanks

[John Feldt ERPA CPC QPA]

Have they considered what they may have to do in the second year to make this carveout work for longer than just one year? Tight carveouts like this have a tendency to fall apart quickly after a short time by either failing 401(a)(26) or 410(b) or both.

[Gary]

it will have to be monitored to meet participation; that's true. thanks

[Gary]

Further thought.

The combined plan passes the 70% ratio test, in fact it is 100%.

The DB plan on its own does not pass the ratio test, but the plans are tested on a combined basis.

If the combined plan passes the ratio test then does it follow that for coverage only, it does not have to pass the average benefit test and thus the db plan does not have to meet 1.410(b)-4 re: the reasonable classification test and thus can cover employees by name (which is not a reasonable classification), since the classification does not have to be reasonable.

Or all employees can be covered in db plan, but only those named in the benefit formula receive an accrual; the rest get $0.

I suppose there are several ways to skin the kitten.

thanks.

[SoCalActuary]

Further thought.

The combined plan passes the 70% ratio test, in fact it is 100%.

The DB plan on its own does not pass the ratio test, but the plans are tested on a combined basis.

If the combined plan passes the ratio test then does it follow that for coverage only, it does not have to pass the average benefit test and thus the db plan does not have to meet 1.410(b)-4 re: the reasonable classification test and thus can cover employees by name (which is not a reasonable classification), since the classification does not have to be reasonable.

Or all employees can be covered in db plan, but only those named in the benefit formula receive an accrual; the rest get $0.

I suppose there are several ways to skin the kitten.

thanks.

I believe you have no reliance on the concept that an employee is covered with a $0 benefit. Common sense says that's a lie.

[frizzyguy]

I think we have gone in several different ways with this and I think I am a bit confused.

Gary, are you telling me that this is a DB plan combined with a profit sharing plan? And do all employees get a benefit of some sort, either profit sharing or defined benefit? (Please note, profit sharing and NOT deferral only.)

If that's the case, then I believe that this thread could have ended right away with a simple, "you're 100% covered". Passes covereage, now onto non-discrimination.

Sorry if I'm misunderstanding, that's not the first time that's happened.

And if you're just asking how to break them into groups to target employees, there are many, many ways to do that.

[Gary]

Back to frizzy guy,

yes, everyone is covered and receiving an allocation in profit sharing plan and a select handful are covered in db plan.

So I agree it is 100% coverage.

I have seen these situations where tpa firms draft db plan documents to articulate certain job classifications as eligible to participate in db plan.

And my challenge to that plan doc technique is that if combined plans already pass coverage then the document would not have to be so carefully crafted to include specific job classifications and could simply refer to individual names in the doc since coverage passes ratio test.

This way you could cover three people with a certain job classification (say technician or administrator or whatever) and not the other two with that same job classification. Or better yet, not even know or care about job titles as they may not even be known to tpa firm.

thanks much and appreciate the comments

[John Feldt ERPA CPC QPA]

I have seen these situations where tpa firms draft db plan documents to articulate certain job classifications as eligible to participate in db plan.

And my challenge to that plan doc technique is that if combined plans already pass coverage then the document would not have to be so carefully crafted to include specific job classifications and could simply refer to individual names in the doc since coverage passes ratio test.

This way you could cover three people with a certain job classification (say technician or administrator or whatever) and not the other two with that same job classification. Or better yet, not even know or care about job titles as they may not even be known to tpa firm.

I agree, but I think the frizzy guy prefers to use job classes or something other than the names.

If the DC portion of the DB/DC combination does not have allocation conditions and has each person in their own rate group, then you could argue that you have a very flexible option to handle 410(b) and 401(a)(4) no matter what happens to the demographics.

[frizzyguy]

I agree, but I think the frizzy guy prefers to use job classes or something other than the names.

You know me too well! I would stay away from naming individually but that's just me. I see lawyers using individually named groups quite often. If you can easily avoid it, I would. I know for certain others don't feel the same way I do.