Define contributions used in Average Benefit Test

[Guest DJean]

Plan failed 410(B) Coverage for just the profit sharing provision, due to last day rule mostly. Plan passed for 401(k) and employer match provisions.

To perform the Average Benefit Percentage Test, are all "employer" contributions (meaning profit sharing, employer match, and employee deferrals) used when calculating the individual participant's contribution percentage although the Plan only failed the profit sharing portion of 410(B)?

[Guest]

You have a great big gadget-box labeled coverage testing.

you toss all the information into this box and push the buttons, and out spits the ratio % information.

first, 401(k) and you said it passes

next, 401(m) and you said it passes

finally, 401(a)(4) and the fog horn goes off saying too many terminees, the 401(a)(4) portion fails ratio %.

However, if a plan fails ratio % for 401(a)(4), it still will pass coverage if it passes the average benefits test.

There are two parts to this test.

1. average benefits percentage test. This includes all contributions and forfeitures to all plans whether aggregated or not.

2. the classification test which only involves the profit sharing sharing contributions and forfeitures. If your 401(a)(4) ratio percentage (obviously less than 70%) is greater than the safe harbor % (which at maximum is 50%) you pass the classification test. In other words, unless you had more than 50% terminees you should be able to pass this portion of the test.

if the plan passes using this method,

make sure you check the appropriate box on the schedule T which says average benefits test was used to pass testing.

note: terminees with less than 500 hours, since they could have deferred are included in the avg benefits % test since that looks at all contributions.

however, they are excluded from the classification test, since that only looks at the profit sharing portion.

also note that you can always include all terminees. I actually had a plan in which a few HCEs quit with less than 500 hrs, and it was actually better to include all terminees in the testing.

[Guest DJean]

Thanks, Tom, for your response. You indicated that "all contributions and forfeitures to all plans" are included in the average benefits percentage test. Reg 1.410(B)-5(d)(2) indicates only employer-provided contributions are taken into account. However, sometimes employee deferrals are considered "employer" contribution and sometimes considered "employee" contribution. Do you have any cites that confirm that ALL contributions (and specifically including 401(k) & match) are included in the average benefits percentage test? That is my dilemma.

[Richard Anderson]

Tom,

Are you sure that terminees with less than 501 hours can't be excluded when doing the ABT in a 401(k) plan? It would seem odd to me that a participant that can be excluded from the coverage test, would be included in the average benefits test. To me, excluded means excluded, and I would not include them in any part of the coverage test.

[Guest]

Richard:

The Avg ben pct test, I would describe as a strange animal.

All contributions are included, even ESOPs, which are generally never aggregated with anything.

So what you have is a plan for coverage purposes consists of 3 'plans' - 401k, 401m and 401a.

For the percentage test all plans are aggregtaed.

an employee who terminated with less than 500 hrs might not be in the 401(a)(4) ratio percentage test, but since they could have deferred they are in the 401k 'plan'.

see last sentence of 1.410(B)-6(a)

Excludable employees

...In determining whether a plan satisfies the average benefit percentage test of 1.410(B)(5), the rules of this section are applied by treating ALL plans in the testing group as a single plan.

and under the single plan rule, you count all bodies that satisfied the minimum eligibility condictions.

DJean:

for additional cites see 1.410(B)-5(d)(5)(iii) which refers you back to 1.401(a)(4)-2©(2)(ii) allocations taken into account....employer contributions include annual additions described in 1.415-6(B)(2)(i)

or see 1.410(B)-5(d)(6) Permitted disparity, in particular (ii) plans which may not use permitted disparity...'thus for example, if a 401(k) plan is included in the testing group...the benefit percentages are determined by first calculating....without regard to the 401(k) plan and adding it to the rate for the 401(k) plan.

so to try and recap, in other words:

avg ben % test

combine everything using minimum requirements of all plans.

you are allowed to impute disparity, but only on the plan (e.g. 401(a)(4)) that could have used disaprity in its calculation. you would never impute on deferrals, match or an ESOP.

[Guest DJean]

Thank you, Tom -- I looked at the cites and I got what you were saying.

[Richard Anderson]

Tom

see last sentence of 1.410(B)-6(a)

Excludable employees

...In determining whether a plan satisfies the average benefit percentage test of 1.410(B)(5), the rules of this section are applied by treating ALL plans in the testing group as a single plan.

When participants are statutorily excluded two plans are created for testing; one plan with those excluded, and one plan with those who meet the staturory eligibility. So, you have two testing groups. The above says that you treat all plans in the "testing group" as a single plan. I have been interpreting that to mean that you would include all plans (401k, 401m, 401a, ESOP), but include only participants in that testing group.

For what other purpose would the reg be referring to "testing group"?

[Guest]

are you attempting to lump 'terminees with less than 500 hours' in the same group as 'otherwise excludables'?

the otherwise excludable option only refers to eligibility age and service, not to an hours requirement to actually receive a contribution.

for further reading, see ERISA Outline Book, Chapter 8

section V Part 3 c 1 (Treatment of otherwise excludabe employees - test separately for avg ben % test) and

c4 for treatment of terminees

(at least in the 2001 edition - these might not be in an earlier edition)

of course, if a terminee

[Richard Anderson]

My brain is not engaging properly.

Tom, you guessed it, I was confusing terminees with < 501 hours with otherwise excludable.

Thanks