"When running component plan testing, we're supposed to make sure the separate plans would pass coverage testing as though they were separate plans. The divvying up of participants would generally not satisfy the nondiscriminatory classification test.

1.401(a)(4)-9 (c)(4) indicates that the average benefits percentage test is deemed to pass for each component plan if the test is passed for the plan as a whole. However, this 'deemed passing' does not cover the nondiscriminatory classification test. As a result (so the story goes) the Average Benefits Test is not available to pass coverage for the component plans and therefore they need to pass the 70% ratio percentage.

I'm curious to see if others have found differing interpretations. In reading through the ERISA Outline book for example, you would have thought there would be a big disclaimer 'Average Benefits Not Available for Coverage!' -- but nothing....

So for example, Component Plan Testing is being run for nondiscrimination, so perhaps one could argue that the reasonable business classification test doesn't apply (perhaps the IRS came to the same conclusion when they didn't mention this in aforementioned 'deemed to pass' reg). I note that my 'normal coverage testing' of course is passing no problem. That's the kind of interpretation I am curious to know is out there.

Now as many of you have likely discovered, because of the patterns of including/execluding HCE's and NHCE's to pass things, getting the ratio percentage above 70% is not particularly challenging, but I do question whether it is even necessary."