Reasonable Classification for Coverage

[Guest BTrustee]

Hi all! The answer to this may be black and white and I apologize in advance if it has been asked before (I did my due diligence searching for the answer on here prior to posting)

Basic info: 1 HCE, 13 NHCEs, multiple contrib allocation groups all of which get a contribution (no zeros), last day employment requirement so all terminees didn't get an allocation

Plan passes ABPT but fails 410(b) ratio percentage at 60%. I understand that the plan can pass coverage with ABPT only, given "Reasonable Classification" was utilized in assigning allocation groups. Given the following excerpt, I would say it's okay to skip the 410(b), however one issue is not clear to me: Is giving a zero allocation to terminees due to the last day employment provision of the plan, not make a "Reasonable Classification" thus requiring us to pass the ratio test??

In a question posed in 2001 by the Joint Committee on Employee Benefits of the American Bar Association, the IRS was asked whether it would be acceptable to name each participant as a separate allocation group under a profit sharing plan and have the employer declare a separate discretionary contribution to each participant (with a view toward using cross-testing to prove the employer contribution is nondiscriminatory). The IRS noted that if a 0% allocation were to a participant, it might be interpreted as excluding a participant by name, in which case the plan would have to satisfy the ratio test for this to be acceptable. However for a plan that is relying on the ratio test to pass coverage, but is naming individuals as excluded from the plan, it is advisable to request a determination letter [...]

Thank you.

[ETA Consulting LLC]

Okay, you are passing both the ABPT and the NDCT. Reasonable Classification is something different; which basically argues that it is a good idea to base your classification of groups on business criteria or some other "reasonable" criteria. For argument sake, placing employees whose grandparents are still living in a group would not be reasonable. <- I'm just making a distinction here.

When it comes to reasonable classification, I don't think "accrual requirements" would have any impact. Regardless of the classification, any member of any group who fails to meet the accrual requirements will not receive an allocation. That many impact the NDCT, but shouldn't have any bearing on whether the classification of the groups are reasonable.

This is merely how I've always pieced this issue together.

Good Luck!