Chapter 5: Average Benefits Test and Special Rules Flashcards by Geoff White

The coverage test can be satisfied by passing one of two tests, which are:

Ratio percentage test

Average benefits test

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If coverage testing using the ratio percentage test is failed. What three choices does the plan have?

Amend plan to expand coverage

Use plans fail safe approach to expand coverage

Apply the average benefits test

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Why is the average benefits test often considered a test of last resorts when it comes to passing coverage?

It’s more complex and requires more data to run the test

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There are two parts to the average benefits test. What are they?

The first part is the non-discriminatory classification test.

The second part is the average benefit percentage test

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True or false, the groups of employees used in the average benefit percentage test is the same as those used in the ratio percentage test?

True

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Similar to the ratio percentage test, the average benefit percentage test excludes which employees? (4)

Non-resident aliens

Union employees

Individuals who do not meet the plans agent and service requirement

Employees who terminate during Plan year with less than 500 service hours

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How does the plan pass the first test the non-discriminatory classification test?

If the classification of employees who benefit under the plan is reasonable and non-discriminatory

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Classification of employees benefit under the plan is considered a reasonable classification and will pass the reasonable classification requirement in what case?

If the classification is established under objective business criteria,

And that criteria identifies a category of employee that’s covered by the plan

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Give a few examples of reasonable classification categories:

Job categories (such as secretaries).

Nature of compensation- hourly/salaried

Geographic location

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Naming individual employees is eligible in eligible is considered a reasonable classification criteria for the reasonable classification test, true or false?

False

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But wait, what is the IRS say about naming individuals as it pertains to reasonable classification?

The IRS appears to indirectly endorse the view that if in naming an individual for exclusion, the plan is able to pass the ratio percentage test then the exclusion is permissible

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Naming an individual as excluded then maybe permissible under a ratio percentage test but not a average benefit test is that correct?

According to the IRS, yes

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The two prongs of the non-discrimination classification are a ___________ classification and a_________ classification.

Reasonable

Non-discriminatory

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In order to pass the non-discriminatory classification requirement for the non-discrimination test, the plans coverage ratio must do what?

either:

Either satisfy:

the Safeharbor percentage test

The fact and circumstances test

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How is the coverage ratio for the non-discriminatory classification determined?

What’s the formula?

It’s determined in the exact same way as for the ratio percentage test

The percentage of benefiting NHCEs / the percentage of benefiting HCE’s

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Using the coverage ratio to apply the safe Harbor percentage test in determining the non-discriminatory classification, what must happen?

1) coverage ratio must be at least equal to the safe harbor percentage to find in the regulations

2) the Safeharbor percentage applied depends on percentage of the NHCE ABP group

3) refer to appendix to see if test is passed

The highest safe Harbor percentage is 50%- any ratio over 50% can be assumed to have passed the test

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The first part of the average benefits test is the non-discriminatory classification test.

Once the non-discriminatory classification has been determined, the test must still pass either the safe harbor or non-safe Harbor test.

In calculating the safe harbor percentage test, the coverage must be at least what in order to pass?

Equal to the safe Harbor percentage to find in the regulations.

There is a table of safe Harbor percentages reproduce in the appendix

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Assume the classification is reasonable and the Safeharbor test cannot be passed. The remaining test option is the facts and circumstances test. What are the criteria to pass?

The coverage ratio must be greater than or equal to the unsafe harbor percentage

And the classification must be non-discriminatory under the facts and circumstances

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Using the fax and circumstances test, in order to pass what has to occur? (2 items)

The coverage ratio based on NHCE concentration percentage must be greater than or equal to the unsafe harbor percentage

And

The classification must be non-discriminatory under the facts and circumstances

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In the facts and circumstances test what relevant factors are considered as to whether the classification is non-discriminatory?

The underlying business reason

The percentage of all employees benefiting from the plan

Weather a proportional number of employees in each salary range that are benefiting a representative of all employees in that range

The difference between the plans coverage ratio, and the Safeharbor percentage

The degree by which the average benefit ratio exceed 70%

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As in the ratio percentage test, what does a “benefiting employee” equal?

For purposes of an employer contribution, it means an employee who is receiving an allocation of contributions or foreigners.

In the 401(k) portion (tested seperately) It means a participant who is eligible to make deferrals

In the 401M portion (tested seperately) a benefiting employee as a participant who would receive a matching contribution if they made deferrals

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In order to use the appendix and determine the Safeharbor percentage that needs to be met or surpassed you must determine, what?

And how is it determined?

The NHCE concentration percentage

Divide the NHCEs in the coverage group by the total employee count in the coverage group

Then referto the appendix

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The second part of the average benefit test is the______ _______ ________ test, which requires what to pass?

The average benefit percentage must be 70% greater

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What is the calculation for the average benefit percentage test?

NHCE ABP / HCE ABP

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What two things must happen in order to determine the ABP for either group?

Each employees benefit percentage be calculated first Determine the average for each coverage testing group (NHCE / HCE)

If an employer is a control group or affiliated service group are the various plans aggregated when determining ABP?

Yes

Are all employees in the coverage testing group considered or only those that are benefiting under the plan when it comes to ABP?

All employees

An employee’s benefit percentage may be either a ________ in a DC plan or a _______ in a DB plan.

Allocation Benefit

Are after tax employee contributions made to a 401(k) plan included in the plans ABP test when determining an employees ABP?

Pretax and Roth are included. After tax is not included

how do you calculate the allocation rate for an employee in the ABP test?

Allocations for the plan year / the employees compensation for the planner

What is the allocation rate inclusive of in a employee benefit percentage percentage?

Allocations are employer contributions, including: Elective deferrals Matching contributions Forfeitures

The benefit rate in a DB plan is what? Which methods are available?

Increase in the employees accrued benefit for the plan year Current year method or accrued to date method

What does cross testing?

It’s when a DC plan tests on the basis of a benefit rate instead of an allocation rate Or When a DB plan tests on the basis of an allocation rate instead of a benefit rate

What is IRC401a4 non-discrimination testing?

This is cross testing, which is often used in profit sharing

A define contribution, Plan is not eligible to be cross tested for IRC 401A4 no discrimination purposes unless it satisfies what test? Or what? I literally took that candle on that candlestick holder jiggles in the basket.

The gateway test Or one of the regulatory exceptions

what is one way that NHCE employee benefit percentages can be adjusted to reach a more favorable outcome when testing EBP?

By imputing permitted disparity

In EBP testing, all compensation must satisfy what definition of comp? What other rule applies to allocations concerning that definition of compensation?

414S It must be consistently applied for all employees

Employee benefit percentages are normally based on allocations or accruals for the _______ ________ being tested.

Plan year

The employer may elect to compute EBP’s as the average of percentages for which years?

Current year Average each employees EBP’s for current year and prior year Average each employee’s EVP’s for current year, prior year and the year before

Distributed contributions are included when determining an employees benefit percentage, true or false? Would that apply to corrective distributions as well?

True Yes

Are deferrals that are re-characterized as catchup included or excluded from the ABP test?

Excluded

In EBP testing, annual editions that are re-allocated to participants are treated how? Access annual addition to distributions of referrals and after tax employee contributions are treated how

Included Excluded

If an employer maintains more than one plan, would All other plans be included in the average benefit percentage testing group?

Yes, they would all be included

Ketchup contributions are included or excluded from ABP testing?

Excluded

Are Roth deferrals included in ABP testing? Are pretax deferrals included in ABP testing? What about after tax referrals?

Yes, Yes No

If a company offers a 401(k) and an ESOP, are they combined for ABP testing?

Yes

Employees that are participating in the 401(k) solely because they are long-term part-time employees must be included in non-discrimination testing, true or false?

False

All plans, whether DB plans or DC plans that a client may have must do what when testing for ABP?

If allocation rates are used, then they must be used across all plans. If benefit rates are used instead they must be used across all plans

If a company offers a DB and a DC plan, they may choose to use separate methods, meaning an allocation method for the DC plan and a benefit method for the DB plan, but what happens as a result?

These plans lose their ability to cross test

If there is more than one plan in the ABP testing group, but at least two plans have different Plan years what happens?

Calculate the EBP’s for the planers ending in the same calendar year

If the employer maintains more than one plan, but all plans satisfy coverage under the ratio percentage test, is it required then that all plans are included in the ABP testing group?

Yes. This is a special aggregation role and is required regardless of whether the plans are otherwise permissively aggregated for coverage.

What does the ABP percentage for the ABP testing group need to be in order to satisfy that part of the average benefit test?

70% or more

Tom’s transmissions is a company that maintains a profit plan with a 401(k) arrangement. The 401(k) includes a match both the 401(k) and 401M pass coverage testing. The profit share fails. In applying the average benefit test the ABP must include what portions of the plan?

The ABP will then have to aggregate 401(k) and 401M portions along with the profit share. Referrals, match, employer, contributions, and for fixtures will all need to be considered.

Long-term part-time employees are included in an ABP testing group, true or false?

False. With such employees that are only in the 401(k) because of the LPTE provision are not included.

Union plans in non-union plans are not combined to calculate the ABP. But our multiple QSLOB plans combined?

Continuity does not need to be used when measuring the ABP between defined benefit and defying contribution place, true or false?

False. If the allocation method is used, then that must be applied in both. No mixing and matching.

Frozen plans will generally not have any effect on ABP calculations, true or false?

True

The ABP Must reflect the employee benefit percentages of _____ employees in the coverage testing group, regardless of whether they are ________ in any plan maintained by the employer

All Benefiting

Employees who have waived participation are not counted in the ABP calculation, true or false?

False an employee that waves participation would still be counted.

If there are two or more plans in the ABP testing group with different age or service requirements, the coverage test testing group for ABP purposes must do what?

Be determined, using the lowest applicable age and service conditions

Concerning the ABP testing group: Participants who are: Who have worked less than: And fail to: Maybe be treated as excludable

Not employed on the last day of the year. 500 hours in a year Benefit under the plan

For define benefit plan, it can measure the average benefit test using what two options?

Benefit basis Allocation basis

What are the two parts of the average benefit test?

The non-discriminatory classification test The average benefit percentage test

What are the two tests inside of the non-discriminatory classification test?

The reasonable classification test Non-discriminatory classification test

Under the reasonable classification test of the non-discriminatory classification test, what are the regulations provide?

That classifications based on: Job categories Nature of compensation Geographic location Are generally considered reasonable classifications

In the average benefit test, phase one is the non-discriminatory classification test. How is the non-discriminatory portion of the determination passed?

The average benefit percentage is greater than 70%

What does fail safe language do in the average benefit test?

They required the test satisfy the ratio percentage test. In order to do so the language automatically causes a specified group of otherwise eligible employees to benefit. Such as employees who terminated during the Plan year are added to the plan in reverse order of their termination date until the ratio percentage test is satisfied

Using file safe language, the ratio percentage test can be satisfied by what

Employees are terminated during the Plan year are added back in Or by reference to compensation employees who failed the benefit are added to the plan in reverse order of their compensation until the ratio percentage test is satisfied

Plans may be permissively aggregated if they have different Plan years, true or false?

False: Under IRC 401A, plans may not be permissively aggregated unless they have the same plan year.

Can a qualified plan be aggregated with an unqualified plan such as a 403B or step to demonstrate the plan cover passes coverage testing?

No, it cannot

Plans are not treated as permissively aggregated unless they aggregate to perform either of which two tests?

Ratio percentage test Non-discriminatory classification test portion of the average benefit test

Wonder what two circumstances would a company decide to use permissive aggregation for coverage test testing?

When one of the employers plans fails, the ratio percentage test, but the employer does not want to rely on the average benefit test What a plan is unable to pass the non-discriminatory classification test portion of the average benefit test, but can pass if it is permissively aggregated with another plan maintained by the employer

If an employer uses permissive aggregation to either pass the ratio percentage test or the non-discriminatory classification what two things are going to happen?

1) all employees under both plans are considered 2) if the plans pass using the coverage testing on an aggregated basis, then their subsequent non-discrimination test testing under 410 B will be required on an aggregated basis as well

Plans may be permissively aggregated to pass coverage testing. But their first hurdle is passing ABP testing. What occurs there?

All plans of the employer are aggregated, and the employees are all considered in order to determine their average benefit percentage. The average benefit percentage must be 70% or greater

If an employer has more than one plan and the employers plans are able to pass coverage separately, may the employer still aggregate the plans to pass coverage and if yes, why would an employer choose to do so?

Yes, Then the employer can aggregate the plans for non-discrimination testing

Two or more ESOP’s may not be permissively aggregated, unless the following requirements are satisfied:

The ratio of qualifying employer securities to total plan assets is roughly the same for each ESOP AND Either: The qualifying employer securities held by all aggregated ESOPs are of the same class Or The ratios of each class held to all qualifying employer securities are substantially the same for each ESOP

Plans that are required to be tested. Separately cannot be aggregated. What are three examples?

A 401(k) portion of a plan with a profit sharing plan An ESOP with a non-ESOP A collectively bargain plan with a non-union plan

You can seem plan types under different plans be aggregated permissively? Like a 401(k) plan election under two separate plans or two separate plans?

Yes

Is it required that plans that are permissively aggregated use the same plan year? In determining ABP how our plan years treated?

One permissively aggregating plans, Plan years Must be the same. ABP testing does not require plans to have the same plan year

If the plans being permissively aggregated have different age or service requirements for eligibility purposes, the excludable employees for the plants must be determined how?

On the basis of the low lowest age in service requirement

If an employer has three plans plan a Plan B and plan c, in the employer, combines Plan A & B for coverage test testing, what happens to plan c?

It is tested and covered separately

If a plan is invested in employer securities, does that automatically create an ESOP portion of a plan?

It does not. A plan must be designed as an ESOP to be treated as an ESOP.

If a plan happens to cover union employees, and non-union employees what must happen?

The portion of the plan covering union employees must be disaggregated from the portion of the plan covering non-union employees

If a plan covers employees and more than one QSLOB, the plan may do what?

To segregate into separate portions representing employees assigned to each QSLOV

In multiple employer, plans, plans covering employees of more than one unrelated business when testing for coverage?

Our just aggregated and the portions representing each businesses employees

an employee might be part of two or more desegregation populations during a single plan year in a crew benefits with respect to service in each of those populations. This may occur under the following circumstances (three)

A plan covers employees and more than one QSLOB A plan covers union and non-union employees A plan covers the employees of two or more unrelated employers

Chapter 5: Average Benefits Test and Special Rules Flashcards

(86 cards)