New Comp - Separate Alloc Groups - Coverage

[austin3515]

Business is making an unusual allocation. The allocation looks to an outsider to be more or less arbitrary. We have cautioned them extensively on deemed CODA's so let us leave that aside for purposes of this question.

Each employee receiving a unique contribution has a very unique job description. For example, one might be VP Finance and the other is VP Marketing. Another is the receptionist, another a machine operator, and you get the idea.

When all is said and done, my coverage ratio is just 62%. I say "we're using reasonable business classifications and therefore I am permitted to run the average benefits test." I know I can for nondiscrimination/rate groups. My question is regarding coverage.

Appreciate your thoughts!

[MWeddell]

See Treas. Reg. 1.410(b)-4(b). I think it depends on how many employees are in each allocation group. If the groups tend to include multiple employees in each group, then the "reasonable classifications generally include specified job categories" language indicates one can run an average benefit test. If the groups tend to each have one person in them, then the key provision is "An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification." Sounds to me like your client is in the second situation and that the plan has failed to satisfy coverage testing.

[austin3515]

Bless you, just what I was looking for. I agree, no average benefits test allowed.

[Gadgetfreak]

This is similar to a situation I am facing now. Based on the Affordable Care Act, a client wants to give an employer contribution to just some of their NHCEs and none of their HCEs based on a dollar amount per hour worked. The plan does not have a profit sharing provision now so I will need to amend the plan to allow for profit sharing with each employee in their own group. At this point, I don't know how many of their employees will NOT be covered under this arrangement. But don't I still need to worry about coverage? And is it coverage for the whole plan or just this profit sharing source? Can I amend to only allow people covered by the ACA to participate and is that a statutory exclusion that won't require coverage testing? Thx.

[BG5150]

If no HCEs benefit, coverage passes automatically, no?

[Gadgetfreak]

Thank you so much for the reply. You know, I was thinking that but then "over-thinked" it saying that that was just too easy. Maybe it is because it is Friday afternoon . I guess I agree that there is no reason why the employer can't do this. But am I testing coverage for this separate from deferrals (because there are HCEs who defer)? Does it even matter? Do you agree that an amendment to add new-comp with each person in their own group is the right plan? Thx.

[Earl]

each benefit structure must pass coverage (or have a pass as with your PS scenario)