Each in own group / No Allocation Conditions

Damn good question from someone in the office:

Plan has no conditions  but they exclude people from getting an allocation if they have less than 1,000 hours or term before last day (not top-heavy).  But, the plan is now below 70% for coverage.  I realize there are Terms with Breaks because last day/1,000 hours is not the "sole" reason they're not benefitting.  But can I use the Average Benefits Test based on the conclusion that excluding people who have less than 1,000 hours or are termed is a reasonable business classification?

Follow-up: Does the answer change if I bring one of them in to pass a failed rate group test?

It is a damn good question, and here's what is probably a damn poor opinion...

I'd say it is risky to assume that this is a reasonable business classification when everyone is in their own group. I believe the IRS opinion is that everyone in their own group is tantamount to "enumerating by name or having the same effect" - and therefore is by definition not a reasonable classification - so that would automatically preclude the ABT for coverage.

Yes, my answer changes if you bring in one or more persons via an 11(g) amendment, if that allows you to pass the ratio test. Once you pass the ratio test, you can then move on to your rate group testing, because once you get to the rate group testing, the "reasonable classification test" does not apply under 1.401(a)(4)-2(c)(3)(ii).

i asked a similar question at an ASPPA meeting a few years ago.  The panel (an unofficial answer, of course) thought that it was OK to use the ABT if the only people not getting an allocation was b/c of the last day or 1,000 hour artificial constraint.

45 minutes ago, Belgarath said:

Yes, my answer changes if you bring in one or more persons via an 11(g) amendment

There's no 11-g amendment available here.  They are excluded by an artificial rule, so there are no conditions to waive.

How many people are you short for the coverage?

This seems really surprising because so many practitioners eliminated allocation conditions to add flexibility.  This would seem to me to be a very significant disadvantage for this approach.

LeEt's assume my coverage ratio is 50%.

And Belgarath, my question assumed bringing in the term was to pass a rate group, not to pass the ratio percentage test.

17 minutes ago, BG5150 said:

i asked a similar question at an ASPPA meeting a few years ago.  The panel (an unofficial answer, of course) thought that it was OK to use the ABT if the only people not getting an allocation was b/c of the last day or 1,000 hour artificial constraint.

Awesome! What year did you ask the question (if you remember)?  I can try and download the Q&A,

15 minutes ago, BG5150 said:

There's no 11-g amendment available here.  They are excluded by an artificial rule, so there are no conditions to waive.

Ah - yes, I didn't read OP carefully enough. My bad.

BG is this it, from 2015?

7 Participants in own Allocation Group

Question: A plan document provides that, for allocation purposes, each participant in his/her own group. There is one participant who will be receiving $0 contribution. Does this preclude the plan from using the average benefits test to pass sec. 410(b) coverage (we know it doesn't preclude the use of that test for general nondiscrimination testing)? The issue is that excluding someone by name is an unreasonable classification for purposes of the average benefits test (Treas. Reg. sec. 1.401(b)-4(b)).

Proposed Answer: It's a facts and circumstances determination. If in a single year a single participant fails to receive a contribution, it is not considered to be an exclusion of the individual by name and, therefore, it is not an unreasonable classification. If, however, a participant receives a zero allocation consistently for a period of years, the plan's allocation procedures may be considered a de-facto exclusion by name, which is an unreasonable classification for purposes of the sec. 410(b) average benefits test. The plan would be forced to satisfy IRC sec. 410(b) by meeting the ratio percentage test.

IRS Response: To be discussed from podium

My understanding is the same as Belgarath's (as usual).

Why can't you bring in an "excluded" person via an 11-g amendment?   Participant A gets an allocation of $x.

16 minutes ago, AndyH said:

My understanding is the same as Belgarath's (as usual).

Why can't you bring in an "excluded" person via an 11-g amendment?   Participant A gets an allocation of $x.

Because there's nothing to amend in the document. The last day/1000 hours are imposed by the sponsor, not the document.

21 hours ago, austin3515 said:

Awesome! What year did you ask the question (if you remember)?  I can try and download the Q&A,

2015 COULD have been it.

It was one of the mid-year conferences, not the annual.  I remember it was in Philly that year.  (I barely remember it with all the drink tickets people gave me, lol.)

But the question you cited was very similar to the one I posed.  The panel pretty much said they believed if everyone who didn't get a contribution was because of that rule, then it was a valid business decision and you could use the ABT.

FWIW I have the opinion of a very well known pension guru that although you can never guarantee the IRS would agree with it, it should be reasonable to assume that the last day / 1,000 hour rules are reasonable business classifications.  They also agreed that if we arbitrarily brought in one of them to pass a rate group (not to pass the ratio percentage test) that that would blow that position up and average benefits for coverage would not be available.