Nondiscriminatory Classification for ABT portion of Coverage

[Vlad401k]

Let's say a plan designates each person into a separate group for Profit Sharing contribution purposes. For instance, let's say the owner maxes out and gives smaller contributions to some NHCEs and 0% to others. Let's say the General Test passes. Now, let's take a look at the Coverage Test.

 

1) Ratio Percentage: Let's say the plan fails Ratio Percentage portion of the Coverage Test.

2) ABT: My understanding is that the plan cannot rely on ABT in this case (even if it passes in terms of the percentages) because the nondiscriminatory classification portion (the first part of ABT) is not passed because the allocation of Profit Sharing contributions is not nondiscriminatory.

 

Would you agree? Would you say that if the plan designates each employee into his/her own group for Profit Sharing allocation purposes, the plan must pass the Coverage on Ratio Percentage and can't rely on ABT (even though the mid-point can still be used for General test if both Ratio Percentage and ABT test are passed)?

[PensionPro]

Depends on the reason some participants are getting zero.  For example, if they are getting zero because they failed to meet allocation conditions, you could still pass coverage using ABT.

[Vlad401k]

Agreed! But, if some NHCEs are excluded arbitrarily, then you basically have to pass Ratio Percentage portion of the Coverage test if you want to do Cross Testing, correct? The reason being is that the Nondiscriminatory Classification clearly states the following:

 

"An enumeration of employees by name or other specific criteria having the same effect as an enumeration by name is not considered a reasonable classification."

 

So, you can't even do Average Benefit Percentage Test because the Nondiscriminatory Classification is not passed.

[PensionPro]

if excluding nhces arbitrarily you will have to pass rpt for coverage.