Nondiscrimination testing

[Belgarath]

This is actually, at this point, a theoretical question, that might become real depending upon what data we receive.

Suppose a plan, for allocation purposes, excludes overtime and bonuses or whatever, and the plan is general tested. Further suppose that for the year in question, the compensation for allocation purposes passes the nondiscriminatory testing percentages.

Now they decide what percentages to allocate to each group. And based upon those allocation percentages, they fail when testing based upon allocation compensation definition, but they would pass if using total compensation.

Are they allowed to elect to use total compensation for the testing purposes only, even though their allocation is based upon a different defintion?

[Tom Poje]

assuming your document doesn't state a specific definition of comp to be used for testing, then you should be able to use any definition that satisfies 414(s)

(unless something has changed that I am not aware)

for example,this was language from a Corbel document (though this particular one is a bit dated)

1.41 "414(s) Compensation" means 415 Compensation or any other definition of compensation that satisfies the nondiscrimination requirements of Code Section 414(s) and the Regulations thereunder. The period for determining 414(s) Compensation must be either the Plan Year or the calendar year ending with or within the Plan Year. An Employer may further limit the period taken into account to that part of the Plan Year or calendar year in which an Employee was a Participant in the component of the Plan being tested. The period used to determine 414(s) Compensation must be applied uniformly to all Participants for the Plan Year.

allocation comp and testing comp are not related, though they could be the same, and in fact, generally are.

[Belgarath]

Thanks Tom. Yes, the document allows discretion. So, for example, assuming that each definition of comp satisfies 414(s), you could test for broadly available allocations or ACP or whatever based upon a different definition of comp than what was actually used for plan allocation purposes. I'm not sure why this struck me as odd, but it just did. Maybe just Monday morning blues...

As I said, this is all theoretical at this point, so I have no idea if such testing would even be beneficial. But it is good to know that we can do it, if it helps pass something that would otherwise fail.

[Tom Poje]

the brain gears are a bit rusty at this end, but I think for gateway purposes its 1/3 of allocation or 5% based on 415 comp,

I'd have to dig into 'broadly available' and see if something special applies there.

[Belgarath]

Yes, agree on the gateway, but I didn't see anything special on the broadly available. I've never actually seen a plan use the broadly available test, but the plan in question apparently will not pass gateway, hence the looking at possible alternatives.

[Tom Poje]

don't get me started on which gateway to use.

the LRMs for Master/Prototype

(Note to reviewer: There are other gateways that may be used in order for a defined contribution plan to cross-test using equivalent benefits under §1.401(a)(4)-8(b). The plan may provide for a different gateway other than the minimum allocation gateway (for instance, the broadly available allocation rate requirement of Regulations § 1.401(a)(4)-8(b)(1)(iii) or the gradual age or service based allocation rate requirement of § 1.401(a)(4)-8(b)(1)(iv)); however, sample language for other gateways is not provided herein. If a sponsor wishes to use other gateways, it is important to ensure that the benefits provided under the plan remain definitely determinable. In order for plan benefits to remain definitely determinable, the plan document should specify which gateway is used. The plan document could allow adopting employers to elect between different gateways, but in order to provide definitely determinable benefits it is not sufficient for the plan document merely to specify that one of the gateway requirements will be satisfied.)

now, how a plan that is not master/prototype can be definitely determinable without specifying which gateway while it would be required in a master/prototype is beyond my understanding, but what the heck.

so anyway I was asked to test a DB/DC combo by a TPA, and the document indicated using 'broadly available', which really has no chance passing (stopping short of large contributions to some NHCEs) with the extreme cash balance formula it had. oh, wait, the DC document description for broadly available references the regs for DC plans only. in fact, the minimum allocation gateway (if that had been selected) was for 5% or 1/3. I'm guessing they had a bad document (DC only rather than a combo plan document), but, well, let jut say this one had some issues that had to be resolved before I could do any testing

[Belgarath]

This one is a 403(b), for which no prototypes are available! And it specifies no gateway whatsoever - just says, in essence, that you can use any method of testing which is permissible under "Applicable Law." Just to make it more interesting...