Combo Plan design - Too Aggressive?

[Cloudy]

Looking at a takeover CB/DC plan. The CB has immediate entry, 0 hour req for a pay credit, 1000 hours for vesting. The owners get a large pay credit and the rank and file get a flat $1000 pay credit. So you have employees with very low compensation getting a very high testing EBAR (and in fact they may never get a benefit from the plan due to the vesting schedule).

My personal feeling is that using these low paid employees to help pass nondiscrimination testing is too aggressive.Opinions?

[My 2 cents]

Irrespective of what one's views may be concerning plans of this sort, isn't giving enough to the low paid employees to pass nondiscrimination the entire idea behind benefit structures like this?

[Tom Poje]

years ago the IRS issued a memorandum on using (in the IRS terms) such a "scheme"

especially if these folks never vest.

I'd say you have a reason for concern

if all NHCEs 'benefit' it might pass a smell test, though the fact, if indeed you are talking about 0 hours to receive but 1000 hours to vest sounds like these folks never truly benefit.

short term employees.pdf

[Cloudy]

Thanks Tom.

[david rigby]

Ah, the controversial "Carol Gold memo". Does anyone treat it as authority?

BTW, a claim that "NHCEs may never vest" is pretty silly, since that applies to every plan.

[Tom Poje]

probably the same employees who "don't need to be covered" under Obamacare because they will never work "that many hours", but then the company wants to use them to support the DB/DC plan.

we want our cake and eat it too.

[Kevin C]

Maybe I'm reading too much into the original post, but I don't read it as saying they are providing the flat $1,000 pay credit only to a select group of lower paid employees. If all of the rank and file who have met the age and service requirements and reached the entry date are receiving the $1,000 credit, that isn't the situation discussed in the Gold memo. Regardless of whether you think the memo has any merit, it shouldn't affect the discussion if the memo doesn't apply to the situation under discussion.

From the memo:

For example, the nondiscrimination requirement is violated by a plan design that

satisfies the nondiscrimination general test by using cross-testing under §1.401(a)(4)-8

where (1) the plan excludes most or all permanent nonhighly compensated employees,

(2) the plan covers a group of nonhighly compensated employees who were hired

temporarily for short periods of time, (3) the plan allocates a higher percentage of

compensation to the accounts of the highly compensated employees than to those of

the nonhighly compensated employees covered by the plan, and (4) the compensation

earned by the nonhighly compensated employees covered by the plan is significantly

less than the compensation earned by the nonhighly compensated employees not

covered by the plan.

If the plan excludes most of the NHCEs except those with low comp or short service, then it's time to discuss whether the memo has any authority and whether it applies.

[John Feldt ERPA CPC QPA]

Correct, the Gold memo indicates that a document written to exclude primarily full time staff from the plan (thus covering primarily short-service employees) violates the "spirit" of the regulations.

I think the Carol Gold memo is indicating that the mathematical tests used and dictated by Treasury Regulation 1.401(a)(4)-1(a) are sometimes not applicable even though it says "This section sets forth the exclusive rules ..." and that instead, Treasury Regulation 1.401(a)(4)-1(c )(2) can override such exclusive mathematical rules as it says "The provisions of [401(a)(4)] must be interpreted in a reasonable manner ..."

Now I would have thought that the mathematics of an exclusive rule was not subject to any interpretation (unless perhaps it's 'new math' being used), but 1.401(a)(4)-1(c )(2) is written right in there. Maybe we just call it the "gotcha" clause.

[Mike Preston]

John, I'm in disagreement with your characterization. I won't belabor the point but to the extent the rules are clear and unambiguous I don't think 1©(2) has any impact and is not to be used by the IRS to justify an attack on a non-discrimination test done in good faith. The Carol Gold memo and the Paul Shultz (sp?) memo provide the only exceptions. The key point is that without a documented exception like the memos referenced I don't believe the IRS will attempt to invoke 1©(2) to invalidate a test that is otherwise done in conformance with the unambiguous rules of (a)(4)/10(b), etc.

[John Feldt ERPA CPC QPA]

Exceptions duly noted.