Nondiscriminatory Classification Test

[austin3515]

If a plan makes haphazard profit sharing contributions to various people, relying on the "each participant is a separate allocation group" method, must it pass the ratio percentage test for coverage due to the nondiscriminatory classification test in the Average Benefits Test?

[Belgarath]

If I understand your question correctly, I'd say no. For 1.401(a)(4) rate group testing, each "group" must pass either the ratio percentage test, OR the average benefits test. The average benefits test under 401(a)(4) is a two-part test: (a) the nondiscriminatory classification test, and (b) the average benefits test. To pass the nondiscriminatory classification test, the coverage ratio must at least equal the midpoint between the applicable safe harbor percentage and the unsafe harbor percentage. The "reasonable classification test" does not apply - under 1.401(a)(4)-2(c)(3)(ii). The nondiscriminatory classification test including including the reasonable classification test is deemed satisfied if the ratio percentage test for the rate group satisfies the midpoint test. So the 410(b)-4(b) problem you mention never enters into the nondiscrimination testing, 'cause when you pass the midpoint, it is deemed satisfied. 

[austin3515]

But that's nondiscrimination testing, my question is specifically about coverage testing.

[Belgarath]

Ah, so I DID misunderstand the question. If it is for coverage testing, then yes, I think you have to pass the  ratio percentage test. The IRS position, as I understand it and unless it has changed, is that each person in their own group is tantamount to naming individual employees, and is not a reasonable classification under 1.410(b)-4(b).