Memory check - rate group testing

[Belgarath]

Checking my memory - is any of the following untrue? (I know there are additional details that I've left out, intentionally)

Re nondiscrimination testing using rate groups.

1. Each rate group must pass either the ratio percentage test, or the average benefits test.

2. For any rate group (or groups) that fail the ratio test above, the average benefits test must be passed for that rate group.

3. Average benefits test consists of two parts, both of which must be passed. One is the nondiscriminatory classification test, (let's call this 4) and the other is the average benefits percentage test (let's call this 6).

4. The nondiscriminatory classification test is itself a 2 part test:

(a)(i) determining the ratio percentage for each rate group (which you probably already did, unless you skipped the ratio percentage test and went right to the average benefits test) and checking to see if the percentage in (a)(i) is =>the testing percentage in 5 below.

5. Several steps, which I won't go into here.

6. Average benefits percentage test - this is performed at the PLAN level, not the individual rate group level. And this may require recalculation of benefits percentages used previously.

[My 2 cents]

My recollection is that to perform a general non-discrimination test, you have to set up a rate group for each HCE in the test (normal and most valuable percentages).

The average benefit test is performed on a controlled group basis unless you qualify for carving some portions out (i.e., separate lines of business, union plans, etc.).

You pass the average benefit test or you don't. If you don't, all rate groups must pass based on the ratio test. If you do, you get to assess the rate groups based on the safe/unsafe harbor percentages applicable when the average benefit test is passed. The safe harbor test is always more favorable than the ratio test, but the average benefits test must be passed to use the more favorable passing percentages. There is no such thing, to the best of my recollection, as determining if a rate group passes the average benefits test on a stand alone basis.

[Tom Poje]

you are correct, each HCE is in their own rate group, and must pass either the ratio percentage test or the 2 part avg ben test.

there is no requirement that all rate groups pass either ratio % or avg ben test, but if some HCEs fail ratio pct test then it is probably a moot point that other HCEs pass ratio pct test, because those HCEs would pass the avg ben tes if you are depending on other HCEs to pass that test. The exception to the rule would be if you were doing component plan testing.

for the avg ben test

there is one and only one avg ben pct test, so it doesn't matter which HCE you are, it is all the same. (again, an exception would be if you are testing otherwise excludables separately, but then that group probably has no HCEs so there would be no reason to perform the test for that group of ees.

the other part of the avg ben test is the non discrim classification test, which ultimately is the same midpoint % for each HCE. that can't change. you have a set NHCE concentration percentage for the plan and the midpoint is based on that percentage.

now, each HCE might have a different ratio % and that ratio % has to be greater than the set mid point to pass.

my 2 cents does add a valid point, if it is a DB plan then you have to worry about passing both normal accrual and most valuable accrual.

[Belgarath]

Should have specified - DC plan. Thanks for the responses.