Using ABPT to pass Coverage

One of the requirements to be able pass coverage using the Average Benefits Percentage Test is to have a reasonable classification.

We have a cross-tested profit sharing plan that does not pass 410(b) 67%.

In terms of the allocation, the plan indicates that each participant is in his/her own group. Does that by itself mean that the plan does not have a reasonable classification and therefore cannot use the average benefits percentage test?

Thanks!

16 hours ago, Dougsbpc said:

One of the requirements to be able pass coverage using the Average Benefits Percentage Test is to have a reasonable classification.

Nitpick, it's the Average Benefits Test that may be used to pass coverage. The Average Benefits Percentage Test is a component of the Average Benefits Test, along with the Nondiscriminatory Classification Test.

16 hours ago, Dougsbpc said:

In terms of the allocation, the plan indicates that each participant is in his/her own group. Does that by itself mean that the plan does not have a reasonable classification and therefore cannot use the average benefits percentage test?

In my opinion, merely having an individual-groups allocation formula does not disqualify the plan from using the ABT to pass coverage. However the classification of employees who are benefiting and not benefiting under the plan must be still be reasonable, and not merely identifying employees by name.

For example, a profit sharing plan is sponsored by company A, which has two divisions, X and Y. Under the terms of the plan, employees of division Y are excluded from participation. A makes a profit sharing allocation to all eligible employees of X under an individual-groups formula. The plan may use the ABT to satisfy coverage, since classification by company division is a reasonable classification.

However, if an employee of X were considered non-benefiting because they were in a group that received a $0 allocation, then the classification would have the effect of classifying employees by name, and would not be reasonable. In that case the ABT could not be used.

Is this strictly 410(b) coverage testing, the percentage of benefiting NHCEs/HCEs?

Individual allocation groups define how the allocations are made, not who is covered. 

If this is for coverage on rate groups, for general 401(a)(4) testing, reasonable classification does not apply.

If you are using the average benefits test to pass coverage rather than the ratio percentage test, the nondiscriminatory classification test is part of the test. 

1.410(b)(4)(b) says in part-An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification.

I believe this applies to the definition of eligible employee not to the benefit formula groups. I looked at a plan the other day that literally defined eligible employee as "John, Susan, Jim, Betty. All other employees excluded." I would say that plan could not pass coverage based on the Average Benefits Test.