Average Benefit Percentage Test "Testing Group" and "taken into account"

[John Feldt ERPA CPC QPA]

We recently took over the work for a controlled group of employers that have a separate 401(k) plan for each employer. Deferral and match only, no profit sharing. All the plans pass the ratio percent test for coverage except for two plans - so the average benefits percentage is applied to test these last two plans for coverage.

One of these two plans is a safe harbor 401(k) plan. The employer has no other safe harbor plan, thus it cannot be permissively aggregated with any other plan for coverage testing, correct?

The final plan happens to be their only 401(k) plan that uses current year testing for ADP/ACP, so I don't think it can be aggregated with the other plans either.

The question is regarding the terms 'testing group' and "taken into account" from the 410(b) regulations.

In 1.410(b)-5(b), the average benefit percentage for a plan is the ratio of the NHCEs actual benefit percentage in plans in the testing group over the HCEs actual benefit percentage in plans in the testing group.

In 1.410(b)-5©, the actual benefit percentage is the average of the employee benefit percentages in the group with all nonexcludables of the employer taken into account, even if not benefiting under any plan taken into account.

In 1.410(b)-5(d)(3), the testing group is defined in 1.410(b)-7(e)(1) which states that the testing group is the plan being tested (obviously) plus all other plans of the employer that could be permissively aggregated with the plan being tested.

So, when reviewing the prior firm’s coverage testing, they ran the average benefits test for the safe harbor plan by showing zeros for all the hundreds of nonexcludables (those are the employees in the controlled group covered by other plans but not covered by the safe harbor plan), then averaging the results. The averaging takes into account all of those zeros.

However, for the current year tested plan, they ran the average benefits test by including allocations for all employees in all plans, including the allocations made in the safe harbor plan, then they averaged those results.

So, for the average benefits test for coverage, the "testing group" is only the plan being tested. So does that mean the average for that test include all the zeros for the nonexcludables covered by other plans because they are to be "taken into account"?

Or, are all the average benefits provided under the other plans also calculated for purposes of determining the average benefits.

It seems like the prior firm did this both ways. Why would the safe harbor plan and the sole current year testing plan be done differently for these tests?

Man, that's a long question. Sorry about that.

[Mike Preston]

Don't have time to research it today, but it sounds like somebody is reading something wrong. In general, there is only one ABPT. There is an exception for otherwise excludables and there is an exception for the special rule that says you run the ABPT separately for DC/DB if testing DC/DB separately. But there is no exception for SH 401(k) plans. It may turn on something as difficult to pinpoint as the meaning of a comma, but I'm pretty sure of the result.

[John Feldt ERPA CPC QPA]

Thanks Mike, that's exactly what I learned from Larry Deutsch. It's takeovers like this that force me to question if I understood him correctly!

[Belgarath]

So, when reviewing the prior firm’s coverage testing, they ran the average benefits test for the safe harbor plan by showing zeros for all the hundreds of nonexcludables (those are the employees in the controlled group covered by other plans but not covered by the safe harbor plan), then averaging the results. The averaging takes into account all of those zeros.

However, for the current year tested plan, they ran the average benefits test by including allocations for all employees in all plans, including the allocations made in the safe harbor plan, then they averaged those results.

I agree with Mike. I think they did it incorrectly for the safe harbor plan. I think it all hinges upon the clause in 1.410(b)-7(e)(1) to which you already alluded, which says that the ABP testing group includes all plans that could be permissively aggregated if paragraph ©(1) of 1.410(b)(7) didn't apply. And as Mike states, there's no special exception for a safe harbor plan.