New Comp plan, coverage, and ABT

[buckaroo]

I have a plan that has been adopted by an employer with 5 divisions. The plan document has been written where each person is in his or her own class. The plan sponsor intends to provide a flat percentage of compensation (7%) to one of the five divisions only. When the coverage testing is run, it will most likely fail the ratio test. The first question is am I able to utilize the ABT or do I have a reasonable classification issue? The plan document calls for each person in their own class, but, in practice, the allocation is a flat percent to one division.

(Before anyone comments, I have spoke with them about amending the document to name each division as a group, but they are resistant as they do not want to put that language in their SPD as they believe that it will alert the other divisions that a contribution is being made to one and not the others.)

[Mr Bagwell]

O'l Buckaroo,

Put the ratio test and ABT on the back burner for a minute... how would the plan pass the gateway test for this cross tested scenario?

[Tom Poje]

the gateway shouldn't be a problem, only those receiving a nonelective need the gateway.

unless there is a heavy concentration of HCEs in the one division I would be surprised if there was a problem, but of course not knowing the numbers...

you are correct, each person in their own division is not a reasonable classification for coverage.

[My 2 cents]

When the plan is giving 7% of pay to one division and nothing to the others, why should it be able to pass? Sounds like a raw deal. What are the chances that most of the HCEs are getting nothing?

The people from the other divisions, when they are no longer able to work, will be able to subsist on their memories.

[BG5150]

Do you have to put the group names in the SPD?

[AndyH]

Not that he needs it, but I second Tom's comments. I don't see an issue.

[buckaroo]

My apologies, but I am confused by the response. Unfortunately, a large percentage of the HCEs will be in the division getting the NEC. (The allocation will not meet the 70%.) While I agree that each person is in their own allocation class is not a reasonable classification, is the fact that it is being allocated as a flat percent to all in a specific division enough to allow for ABT. To better clarify, my question is does the reasonable classification requirement become an issue based on plan design or in actual practice from the method of the contribution allocation?

[John Feldt ERPA CPC QPA]

Are you suggesting that this might be a potential violation of 410(a) for the non-benefiting divisions? Requiring more than 1 YOS to get an allocation?

If the plan is written to explicitly exclude all other divisions from PS eligibility, then would that solve the reasonable classification problem?

[AndyH]

From what you have described, the employees who benefit are doing so because the employer has identified them as being in Division X. If this is true, I would view this as being a reasonable classification under 1.410(b)-4.

Just one opinion. This is a facts and circumstances determination.

ps I would not deviate from that division criteria by one person.

[Mike Preston]

This is very much a form over substance issue, but the bottom line is that Tom's post is determinative.

If you have somebody "IN" the plan who gets a "ZERO" allocation then, by definition, you don't satisfy the rules to be a reasonable classification. Hence, no ABT for the plan. Those benefiting must satisfy the ratio percentage test (70% threshold).

[ETA Consulting LLC]

Thank you Tom and Mike.

Before the employer actually follows through on the 7% to a single division, run the Coverage Ratio Test to see if it would pass. If not, then explore alternatives (i.e. provide the 7% to only the NHCEs in that division; maybe include additional HCEs one at a time up to the limit). Never think for the client, but educate them on the rules and their potential alternatives.

Good Luck!

[buckaroo]

Thanks for all of the replies. Mike Preston, I just want to confirm my understanding of your comment. You are saying that since the plan is written for each person to be in their own group, then if a person does not get the allocation, then the ABT is off the table. If the plan was written where the groups were defined as each division, then the plan could use the ABT. So, in your opinion, the reasonable classification is done via the plan document and not via the operation of the plan. Do I have this right?

[Mike Preston]

Thanks for all of the replies. Mike Preston, I just want to confirm my understanding of your comment. You are saying that since the plan is written for each person to be in their own group, then if a person does not get the allocation, then the ABT is off the table. If the plan was written where the groups were defined as each division, then the plan could use the ABT. So, in your opinion, the reasonable classification is done via the plan document and not via the operation of the plan. Do I have this right?

Not exactly. Re-phrase that to: Since the plan is written such that the plan sponsor can arbitrarily decide to provide one or more participants with zero, then if a person (or persons; or group; or groups) do not get an allocation, then the ABT is off the table. Maybe I'm being too conservative. What do others think?

[AndyH]

Isn't that what I said?

[Mike Preston]

From what you have described, the employees who benefit are doing so because the employer has identified them as being in Division X. If this is true, I would view this as being a reasonable classification under 1.410(b)-4.

Just one opinion. This is a facts and circumstances determination.

ps I would not deviate from that division criteria by one person.

Andy, the above says the opposite of what I'm saying, not the same thing.

[buckaroo]

1) I have been under the impression that if the plan document is written where the groups are named in the plan document (e.g. Division A, Division B, etc.) then it would be a reasonable classification and the ABT would be permitted. My thought process has been that the employees who benefit under the plan is established under objective business criteria. All employees of Division A get the allocation and Division B does not.

2) If the plan document is written where each person is in his/her own group AND the allocation is performed where some people get the allocation and some do not arbitrarily (Mr. Smith get a contribution and Mr. Joes does not) then this would NOT be a reasonable classification and the ABT would NOT be permitted.

3) The issue is if the plan document is written where each person is in his/her own group and the allocation is performed where the people of one division get the allocation and the people in the other division get no allocation, then I am unclear and think it is open to interpretation. The document is written where each group is named so it would not be considered a reasonable classification. Alternatively, and in practice, the employees who are benefitting were done via an objective business criteria so it could be a reasonable classification. This is my thought process.

[John Feldt ERPA CPC QPA]

That's pretty much what I thought too, until I heard the IRS speak about this during the DC Q&A at the ASPPA Annual conference in 2015. I think Don Kiefer (sp?) mentioned that even if you have each person in their own class that you still look at the facts and circumstances to see if the actual excluded (zero allocation) group is a reasonable business classification. Then I fell out of my chair.

Of course that's just a verbal IRS unofficial opinion.