Rate group failure - correction options

[TPApril]

Cross tested plan is not set up with individual rate groups for each participant, but rather rate designations (ie 5%, 10%, 15%).

Rate group fails for one HCE. We see two options for correcting, but neither one fits cleanly into the rate group designated percents, is it still okay?

1. Reduce failing HCE from 15% to 14% (preferably than to 10% since 14% passes)

2. Increase 1 NHCE from 10% to 12.35%

[Mike Preston]

2 works with 11g amendment. 

[TPApril]

59 minutes ago, Mike Preston said:

2 works with 11g amendment. 

For clarification then, option 1 would not be an option

But reducing said HCE to 10% would be, without amendment

And option 2 would be possible, effective for prior plan year, with 11g amendment?

[Mike Preston]

5 minutes ago, TPApril said:

But reducing said HCE to 10% would be, without amendment

How? 

[TPApril]

21 minutes ago, Mike Preston said:

How? 

I was thinking because the % groups are arbitrary, HCE's can be put into any of them. (amount not deposited yet)

[Mike Preston]

Would have to see language but it seems fishy. 

[TPApril]

2 hours ago, Mike Preston said:

Would have to see language but it seems fishy. 

The language seems pretty basic for each group, ie 'Group n shall consist of Category n employees'.  Categories are 'designated by the Company' outside of the plan document.

[Mike Preston]

By when? 

 

[TPApril]

2 hours ago, Mike Preston said:

By when? 

 

There is no date specified in VS.  It simply says:

"The Company shall notify the Plan Administrator in writing of the amount of contributions allocated to each group." When the company does so, it also indicates who is in each group.
 

[Bird]

14 hours ago, TPApril said:

Categories are 'designated by the Company' outside of the plan document.

Is this language in the document?  Or is it just as you describe it - 'Group n shall consist of Category n employees'?  And "n" is not defined?

Are the rate designation percentages fixed in the document?  If I understand it, you have rates of 5, 10, 15% in the document, but pick and choose who gets those rates?

[Tom Poje]

the LRM from a few years ago (2017) indicated (emphasis mine)

 

Sample Adoption Agreement Language:

( ) Employer contributions will be allocated under the following method (select one)

A. ( ) Participant Group Allocation

Each eligible employee is assigned to a participant allocation group, as follows:

(Describe the objective criteria for determining the make-up of each participant allocation group. Criteria may not be subject to employer discretion, which would cause the plan to fail to have a definite allocation formula.

..

so if the person is in a group that is to be allocated a set % I don't see how you can give a smaller % if you follow the terms of the document. and I don't see how you could toss him into a group receiving a smaller %, because now you don't have a definite allocation formula.

[Bird]

1 hour ago, Tom Poje said:

so if the person is in a group that is to be allocated a set % I don't see how you can give a smaller % if you follow the terms of the document. and I don't see how you could toss him into a group receiving a smaller %, because now you don't have a definite allocation formula.

But if the groups aren't defined in the document, is that a good thing or a bad thing...?  I tend to agree with you but perhaps an argument could be made that nobody is really assigned to a group until the contribution is finalized.  I'm not saying I want to be making that argument but maybe it is not that different from "everyone in their own group and we will determine the allocation to each group when we make the contribution."  IOW this approach is "the allocation to each group is X and we will determine who is in what group when we make the contribution."  I doubt it's the way the document was meant to be used though.

[Tom Poje]

but you can't "the allocation to each group is X and we will determine who is in what group when we make the contribution."  because that violates Criteria may not be subject to employer discretion, which would cause the plan to fail to have a definite allocation formula.

[TPApril]

Thanks to all for input.

To follow up on Bird's comment - why is this discretion different from individual rate groups? Only difference seems to be there are limited %age amounts, rather than wide open as for individual rate groups, so perhaps this is more of a definite allocation formula than that is?

[Mike Preston]

It just is. 

[Tom Poje]

I'd say one difference is that if you have each person in their own group, the IRS has indicated that is the same effect as 'by name', so for purposes of coverage you lose the avg ben test. (and maybe someone was trying to plan ahead just in case the IRS would make the same rule apply to nondiscrim testing as well.

so this sounds like an attempt to beat the system, e.g. I have 3 groups 5%, 10% and 15%, so its not by name. I just pick and choose each year who is in what group. But this makes it discretionary each year and fails the definitely determinable rule.

[TPApril]

so with individual rate groups, this wouldn't be an issue, and no 11g amendment even necessary?

[Mike Preston]

Correct. 

[Bird]

Just to clarify, I agree with Mike and Tom.  My suggestion was more akin to a parachute.

[BG5150]

And remember, with an 11g amendment you can only increase benefits.  You cannot reduce them, even for HCEs.

[AndyH]

 

On the planet where they produce such documents, they also might produce other language that restricts what you do when the test fails, so better to take a look.

[TPApril]

On 8/9/2019 at 5:49 AM, BG5150 said:

And remember, with an 11g amendment you can only increase benefits.  You cannot reduce them, even for HCEs.

Would it be a reduction of benefits for an HCE if it hasn't been deposited yet?

Testing is being conducted under intended contribution to see if it passes.

[Bird]

14 hours ago, TPApril said:

Would it be a reduction of benefits for an HCE if it hasn't been deposited yet?

There are different dates that could determine when a benefit has been accrued and can't be reduced - possibly last day of year, or earning a certain number of hours - but the deposit date is not one of them.

[BG5150]

You have to allocate according to the terms of the document.  If an HCE is part of "group 2" then she gets the same allocation as the rest fo the people in group 2 if she accrued the right to a PS.

 

If you need/want to give someone MORE for whatever reason, you can do an 11-g amendment.  What you CANNOT do, if have any increase favor HCEs.  For example, say you have plenty of room passing testing.  You can't give HCEs more to get closer to that passing threshold.  Another thin you cannot do is reduce the amount for anybody (usually an HCE) in order to pass testing.

 

Everybody in their own group alleviates some of this.  A time where you would need an 11-g amendment in this situation is if there is a last day rule and someone is only getting the SH and gateway and the testing requires NHCE getting more than the GW.  You can't just give that person more; they didn't accrue the right to a PS.  However, you can do an 11-g amendment to give them an allocation.  (This is one reason I do not put in allocation requirements in my docs with everyone in own group.)

[TPApril]

Bird, BG - thanks!

So, originally I was looking to adjust the intended contributions to facilitate passing the test. Wrong. Instead, what is needed is to correct the failing test results of the allocations as already determined. Increasing NHCE's with an 11g amendment seems to be the best approach. My understanding is it can be arbitrary who to increase among NHCE's, so as to minimize total employer cost.