Everyone in own group--can't use which test?

[BG5150]

If everyone is in their own group, you fail the reasonable classification test. So does that mean I must pass rate group testing with 70%?

Do I also lose the ABT for coverage?

I forget how that affects things. Seems like everyone is just loving the own group thing, but I know it has drawbacks.

[Belgarath]

I did the following for myself a while back, because I also have a hard time remembering what is what. Hope it may be of assistance, and hopefully it is correct! I make no warranties...

There is a potential problem for COVERAGE using the Average Benefits Test, due to the requirements of 1.410(b)-4(b), and whether the IRS believes that having each person in their own group is tantamount to “enumerating by name.” If they believe this, then the ratio test must be passed, because the average benefits test for COVERAGE requires a “reasonable classification” – and enumerating by name or having the same effect is by definition not a reasonable classification.

When we are talking about the nondiscrimination testing under 1.401(a)(4) for rate group testing, there is a crucial difference.

To satisfy nondiscrimination testing using rate group testing, each rate group must satisfy either the ratio percentage test (70%) OR the average benefits test.

When determining if the average benefits test passes for a rate group for NONDISCRIMINATION purposes under 1.401(a)(4), it is a two part test:

A. The nondiscriminatory classification test, and
B. The average benefits percentage test.

To pass the nondiscriminatory classification test, the coverage ratio must be at least equal to the midpoint between the applicable safe harbor percentage and the unsafe harbor percentage. The “reasonable classification test” does NOT apply – under 1.401(a)(4)-2©(3)(ii), the nondiscriminatory classification test including the reasonable classification test is deemed satisfied if the ratio percentage test for the rate group satisfies the midpoint test. So the 1.410(b)-4(b) problem never enters into the nondiscrimination testing, ‘cause when you pass the midpoint, it is deemed satisfied.

[BG5150]

Great! I was treating the "nondiscriminatory classification" and “reasonable classification" tests the same.

I am copying and pasting that into a doc and keeping it with my other compliance related shortcut docs.

Happy Holidays!