Average Benefits Test to pass coverage

[BG5150]

We have a plan that has everyone in their ow group for PS allocations.  They exclude terminated EEs from receiving the PS.  As a result this year, I only have 7/12 NHCE benefitting, 58%.

Average Benefit Test passes.  Am I OK to use the ABT, because I think we have a "reasonable" classification of terminated EEs. We (the client) did not pick or choose certain people to not benefit; the document did that for us.

[duckthing]

I think that's a reasonable interpretation but don't have a citation handy. Tom Poje's answer here seems to reason along the same lines you did.

[Mike Preston]

The history on this issue is far from determinative.  There are some at the IRS who believe that excluding those terminees in favor of actives does not constitute a reasonable classification.

I'm on record as saying that it SHOULD be a reasonable classification, but that and $8 or so will get you a big coffee at a national coffee shop.

I'm further on record saying that I don't think any court in the land would consider it any other than a reasonable classification, but again, that and $8 or so will get you a big coffee at a national coffee shop.

Ultimately, it should be the client's decision as to whether remedial action is required.

[BG5150]

Well, my boss, the owner of the company, and a pretty sharp guy, thinks that's it's a reasonable classification.  I just wanted to see what the group thought. At first, I was thinking "everyone in own group, no ABT for coverage."  But after his explanation, I'm in his camp now.  If we didn't exclude ALL terminees, then we would have a problem.

[Mike Preston]

I'm afraid I just now noticed that this is a plan with everyone in their own group.  That is a horse of an entirely different color.  Change the facts slightly. 8 eligible NHCE's. No terminees. Allocate to 5. IRS takes the position that it can't, by definition, satisfy reasonable classification. Therefore no ABT.  Change the facts so that the 6th through 8th persons are terminees.  Doesn't change things. No reasonable classification so no ABT.

[Bird]

Right.  I think the problem is in this statement:

We (the client) did not pick or choose certain people to not benefit; the document did that for us.

The document is NOT saying terms don't benefit.

[Tom Poje]

ultimately, one of the problems trying to answer a question.

you answer it one way and then realize later the question pertained to slightly different conditions. (missing the point everyone in their own group)

the IRS has said that if everyone is in their own group you can't use avg ben test for coverage. And the proposed regs wanted to apply that to nondiscrim testing as well, but they rescinded that item.

I think most agree excluding terminees is a reasonable classification (I think even the regs imply this when they say you can do this but if they work over 500 treat them as includablle and not benefiting i, but irrelevant once you have everyone in their own group.

 

[BG5150]

48 minutes ago, Bird said:

Right.  I think the problem is in this statement:

We (the client) did not pick or choose certain people to not benefit; the document did that for us.

The document is NOT saying terms don't benefit.

I said in my original post:

Quote

They exclude terminated EEs from receiving the PS.

 

Maybe I should have been clearer.  The document imposes a last day rule for PS.

[John Feldt ERPA CPC QPA]

From the 2000 Annual ASPPA Conference:

 

22.   Company A has 11 nonexcludable employees; one HCE and 10 NHCs.  Four of ten NHCs leave employment during year after working more than 500 hours.  Plan requires end of year employment for allocation. Coverage ratio is therefore 60%, which meets the non-discriminatory safe harbor at 1.410(b)-4(c)(2).  Plan also passes the average benefits percentage test of 1.410(b)-5 (e.g. on a cross-tested basis).  Plan still must cover reasonable class per 1.410(b)-4(b) to pass the average benefits test of 410(b)(2).

 

Question:  is “those employed on the last day of the plan year” a “ reasonable classification” for purposes of 1.410(b)-4(b)?

 

IRS: Yes.

 

From the 2001 Annual ASPPA Conference:

 

46. The average benefits test for coverage testing consists of the nondiscriminatory classification test and the average benefits percentage test.  To satisfy one part of the nondiscriminatory classification test, it is necessary to determine if the classifications are reasonable based on objective business criteria.  Do participants employed at the end of the plan year constitute a “reasonable classification” under Treasury regulation 1.410(b)-4(b)?

 

IRS: No. Our opinion is that it is not a reasonable classification.

[BG5150]

Well, that certainly clears things up...

[Belgarath]

Here's what I think, and it is nothing more than inconclusive general blathering. I get cheaper coffee than Mike, so my thoughts and $1.25 will get you a medium coffee at a thoroughly disreputable local convenience store.

I think almost anyone outside of the IRS, and likely some within the IRS, would agree that "terminated participants" is a "reasonable" classification by any rational standard.

However, as previously indicated by others, the IRS appears to have taken the approach that if everyone is in their own group/classification, then by definition there is no reasonable classification, and you can't use ABT for coverage testing. (FWIW, that's how we operate - maybe we are just cowards).

I have no idea how you'd fare if you took this up the ladder at the IRS, if in fact an auditor even raised the issue, and how you'd fare in court if you went beyond that. I think I'd describe the issue and options to the client, and have them decide - preferably in conjunction with legal counsel. However, legal counsel might well cost more than just giving contribution to two more NHC, so they might want to just make the darned contribution?

[Bird]

BG, it's a bit unusual to have everyone in their own group AND have a last day requirement (although we have, or had, a plan or two that way, frankly unintentionally).  A reason for not doing it is to have total flexibility, including giving terms contributions without a corrective amendment.  Maybe it is working to your advantage here.

[BG5150]

The way my boss explained it to me, is that if we exclude terms, we can exclude terms under 500 hrs from testing altogether.  Without that exclusion, they would be included.

[K2retire]

3 hours ago, BG5150 said:

The way my boss explained it to me, is that if we exclude terms, we can exclude terms under 500 hrs from testing altogether.  Without that exclusion, they would be included.

I've not heard that argument before.

[Bird]

4 hours ago, BG5150 said:

The way my boss explained it to me, is that if we exclude terms, we can exclude terms under 500 hrs from testing altogether.  Without that exclusion, they would be included.

Ok.  As long as there aren't any other employer contributions.  We're almost always using a SH.