Rate Group Testing - Mid-Point vs. Actual Coverage %age

[austin3515]

(ii) Application of nondiscriminatory classification test. A rate group satisfies the nondiscriminatory classification test of § 1.410(b)-4 (including the reasonable classification requirement of § 1.410(b)-4(b)) if and only if the ratio percentage of the rate group is greater than or equal to the lesser of—

(A) The midpoint between the safe and the unsafe harbor percentages applicable to the plan; and

(B) The ratio percentage of the plan.

I could never figure out the significance of B), but is the point that it is possible for a plan to pass coverage with a coverage ratio of less than the mid-point, assuming it can pass the facts and circumstances test? So the mid-point is 35, the coverage ratio is 32% (Avg Ben is passed of course), and therefore each rate group need only be 32%?

[Tom Poje]

I don't think so.

let's suppose you have a plan (not cross tested) that because of last day rule/hours/controlled group, etc passes coverage because the ratio % is greater than the unsafe harbor % and you pass the facts and circumstances test because you have a letter from mom or you slipped some $ under the table to the IRS agent or whatever.

since the plan passes coverage, and you do not have a cross tested plan you don't have to perform nondiscrimination testing.

but instead now you throw a wrinkle into the matter - you also have a formula that needs nondiscrimination testing.

now you have to have each HCE have a ratio % > midpoint AND pass the ratio % of the plan. but if your midpoint is 35% that is not going to be greater than the plans ratio % of 32%

so you have a plan that as a whole passes coverage, but fails nondiscrimination testing.

[austin3515]

I know everything you just said and yet still have the same question?

so for coverage you either pass

1. safe harbor

2. unsafe and facts and facts and circumstances (e.g. your mom says its ok, you paid off the IRS agent or something similar)

That;s just it - under item 2, the ratio %age might be less than the mid-point.

HEre is a question, plan's ratio %age is 32, and the mid-point is 35. There is just 1 rate group. What must the ratio percentage for the rate group be to pass testing (assuming ALL other aspects of Avg Ben. are passed, including facts and circumstances)?

[My 2 cents]

My recollection is that if you beat the safe harbor percentage, you pass. If you fall below the unsafe harbor percentage, you cannot pass, even with a note from the principal. If you fall in between the two, it comes down to facts and circumstances. Does it really say somewhere that you can pass, without resorting to facts and circumstances, just by being above the midpoint between the safe and unsafe harbor percentages?

Being at or above the midpoint may be facts/circumstances in your favor and being below the midpoint may be unfavorable, but I don't think that whether one is above or below the midpoint is determinative.

The two cites in the original post seem to verify this. I do not see any reference in them to the midpoint.

[austin3515]

_{Does it really say somewhere that you can pass, without resorting to facts and circumstances, just by being above the midpoint between the safe and unsafe harbor percentages?}

Yes, for nondiscrimination/rate group testing (not for coverage).

[Tom Poje]

so in other words, what you want to do is render useless the idea of the 'midpoint' because as long as you can pass the unsafe harbor and facts and circumstances test you are ok. if true, why bother even having a concept of midpoint.

I will post the IRS notes again

see in particular p 68 and 135

when doing rate group testing it is the midpoint that you must pass not the unsafe harbor.

irs nondiscrim notes.pdf

[austin3515]

so in other words, what you want to do is render useless the idea of the 'midpoint' because as long as you can pass the unsafe harbor and facts and circumstances test you are ok.

That;s not what I'm saying at all. I'm saying those hyper-rare situations, wich I have never experienced, where the coverage ratio (i.e., from coverage testing) is less than the mid-point, then you would use the lower coverage ratio.

Otherwise, can you explain what the above cite means?

[Tom Poje]

then possibly, though I would go beyond saying that would be a hyper-rare situation, because you still have to pass facts and circumstances, which, I would guess, if the plan involves cross testing would toss that out the window.

(But I have too many ADP test to run to worry about the possibility of this situation (much less proving facts and circumstances))