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26 Cards in this Set

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Minimum coverage (IRC section 410(b))
Minimum coverage requirements are satisfied if at least one of the following tests is satisfied:
1) Ratio Test

2) Average Benefits Test
Ratio Test
- Ratio must be at least 70%

- Ratio percentage is: (benefiting NHCEs/non-excludable NHCEs) divided by (benefiting HCEs/non-excludable HCEs)
Average Benefits Test
3 part test - all parts must be satisfied

1) Subjective reasoning classification test (treasury regulation 1.410(b)-4(b))
2) Nondiscriminatory classification test (Treasury regulation 1.410(b)-4(c))
3) Average benefit percentage must be at least 70%
Average Benefits Test

Subjective Reasoning Classification Test (TR 1.410(b)-4(b))
This is satisfied if the plan benefits a reasonable classification of employees.
- A reasonable classification can be by job category, type of salary (hourly or salaried), or geographic location.
Average Benefits Test

Nondiscriminatory classification test (Treasury regulation 1.410(b)-4(c))

Test
The ratio percentage must be at least equal to a safe harbor percentage.

- The safe harbor percentage is found in a table (provided with the exam) in regulation 1.410(b)-4 using the NHCE concentration percentage. In order to apply this table, the NHCE concentration percent must be ROUNDED DOWN to the next integer.
Average Benefits Test

Nondiscriminatory classification test (Treasury regulation 1.410(b)-4(c))

NHCE Concentration Percent
non-excludable NHCEs
___________________________
non-excludable employees

(for purposes of the ABT - this could be different from the non-excludable employees for the plan because all plans must be aggregated for the ABT)
Average Benefits Test

Nondiscriminatory classification test (Treasury regulation 1.410(b)-4(c))

NOTE CONCERNING - NHCE Concentration Percent
There has been much debate whether there is only one concentration percentage per ER (rather than plan) since the ABT compares the individual plan's ratio percentage to the safe harbor percentage and the regulation is not clear as to whether the concentration percentage is determined per plan or by aggregating the ER

(in other words, it would be determined using the aggregate percentage of non-excludable employees from any plan of the employer). While a few years back the most common interpretation had been that each plan had an individual concentration percentage, current thinking is generally that there is only one concentration percentage per employer. Since this is not clear from the regulations, the issue CANNOT BE TESTED on the EA-2L exam.
Average Benefits Test

Nondiscriminatory classification test (Treasury regulation 1.410(b)-4(c))

If Ratio Percentage is less than Safe Harbor Percentage but greater than the unsafe harbor percentage
Then there is a facts and circumstances test that may allow the plan to still pass this step of the ABT.
Average Benefits Test

Nondiscriminatory classification test (Treasury regulation 1.410(b)-4(c))

Facts and Circumstances that can help to pass this test are:
- Good business reason for using the classification of employees
- A high percentage of employees benefiting under the plan
- A representative number of employees within each salary range benefiting under the plan.
- A relatively small difference between the safe harbor percentage and the ratio percentage
- An ABT that is large
Average Benefits Test

Average Benefits Test (Treasury Regulation 1.410(b)-5(a))

ABT must be at least
70%
The average benefit percentage is the ratio of the average of the benefit percentage for the non-excludable NHCEs to the average of the benefit percentages of the non-excludable HCEs.

Non-excludable participants not benefiting must be included here, with a benefit percentage of 0%
Average Benefits Test

Average Benefits Test (Treasury Regulation 1.410(b)-5(a))

Benefit Percentages are generally the ratio of
the accrual
______________________________________________
the average compensation (normal accrual rate)

See the rules for general testing under IRC section 401(a)(4) for more detail
Average Benefits Test

Average Benefits Test (Treasury Regulation 1.410(b)-5(a))

Exception for using most valuable accrual rate in regulation 1.410(b)-5(d)(7)
This generally applies when there is a subsidized ER benefit (the average early retirement reduction for each of the first five years before NR is less than 4%)

This exception does not apply if the early retirement reduction is currently available (see section regarding IRC section 401(a)(4) for a definition current availability) to the NHCEs in a percentage at least 70% of that available to the HCEs.
Average Benefits Test

Average Benefits Trest (Treasury Regulation 1.410(b)-5(a))

All plans of the employer (other than those benefiting collectively bargained employees) MUST be
aggregated for the average benefit percentage.

Any employee after-tax contributions are not taken into account (Treasury regulation 1.410 (b)-5(d)(2). Note that 401(k) salary deferrals for the current year under IRC section 414(v) are excluded from the average benefit percentage (Treasury regulation 1.414(v)-1(d)(3)(ii))
Average Benefits Test

Average Benefits Trest (Treasury Regulation 1.410(b)-5(a))

If the PY of the aggregated plans are different, then use
the plan years that end in the same calendar year (Treasury regulation 1.410(b)-5(D)(3)(II).

Determine the benefit percentages for each subset of plans with the same plan year seperately, and then add them together to get a total benefit percentage
Average Benefits Test

Average Benefits Trest (Treasury Regulation 1.410(b)-5(a))

As an option, plans of only the same type (DB or DC) can be aggregated for the average benefit percentage only if
the other type of plan satisfies 410(b) by aggregating only that plan type. (see treasury 1.410(b)-5(e)(3))
Participants are non-excludable if
they satisfy the statutory (IRC section 410(a)) participation requirements of the plan.

NOTE: that a plan can provide for a more lenient eligibility requirement than under IRC section 410(a). In that case, the non-excludable employees are determined USING THE PLAN'S eligibility requirements

If the plan has multiple sets of eligibility requirements (or if the plans with different eligibility requirements are being aggregated), participants are non-excludable if they satisfy at least one of the sets of eligibility requirements. Since the ABT requires aggregation of plans, the non-excludable employees for the purposes of the average benefits test can be different from the non-excludable employees for the plan being tested.
Terminated employees eligible to participant in the plan are excludable if
there is a requirement to work a specified number of hours in order to accrue a benefit, and employee works no more than 500 hours during the year. Non-terminated PARTICIPANTS are non-excludable even if they work no more than 500 hours. (NOTE: this is the same rule as was described under IRC section 401(a)(26).
Participants are benefit if they are
considered to be receiving a benefit during the year.

- In a DB plan they must earn an accrual

- In a DC plan they must receive a contribution
*However, in a 401(k) plan, an employee is benefiting if he is eligible to make an elective deferral, even if there is not election to defer
Considered to be benefiting
- does not receive an increase in benefit accrual solely due to the application of the IRC section 415 limits is considered to be benefiting
- has exceeded the maximum number of years of service allowed in a benefit formula
- whose prior benefit accrual exceeds the benefit allowed under the current benefit formula
- who has reached NRA but does not receive an accrual due to suspension of benefits rules
- A former employee is benefiting if the plan is amended to provide an additional cost of living increase to the former employee's benefit. This is different from cost of living increases already accrued.
Employers with only HCEs
automatically satisfy the rules of IRC section 410(b)
If no HCEs are benefiting under the plan
the plan is deemed to satisfy the coverage requirements (treasury regulations 1.410(b)-2(b)(6))
Each plan is generally tested separately. If a plan has separate asset pools, one for a subset of the participants and another for a different subset of the participants,
the asset pools are treated as separate plans, and each group must satisfy the requirements of IRC section 410(b)
Plans may be aggregated in order to pass coverage. However, 401(k) and 401(m) plans must be tested
separately since they have their own tests (ADP and ACP tests)
- Plans must have the same plan year
- Plans benefiting collectively bargained employees must be disaggregated. If a plan benefits both union and non-union employees, the union employees are disaggregated
- NOTE: for the average benefit percentage, all plans of the employer (other than union plans) generally must be aggregated regardless of any other rules (other than the option previously noted allowing separate average benefit percentages for all DC plans of the employer and all DB plans of the employer)
-See appendix at the end of the outline for a summary of permissive and required aggregation rules
Otherwise excludable employees are those employees who could have been (but weren't) excluded from the plan if the maximum statutory age and service requirement of the minimum age 21 and 1 year of service had applied.
These employees can be disaggregated from the rest of the group and be treated as if they were covered in a separate plan.

Disaggregating otherwise excludable employees can be helpful when the otherwise excludable employees are all NHCEs (their disaggregated group passes coverage since there are no HCEs in their group).
Testing Period
- plans may be tested annually, quarterly, or daily.

- Annual testing is the most common (testing is typically done on the last day of the year in this case). All employees working at any time during the year are included as employees, and any employee who is excludable for the entire year is considered an excludable employee. A snapshot date (a single day during the year) can be used as a reasonably representative date instead of tracking all employees during the course of the year
Acquisitions and dispositions
- plans that satisfied IRC section 410(b) immediately prior to an acquisition or disposition are deemed to satisfy IRC 410(b) for the transition period beginning on the date of the acquisitions or disposition, and ending on the last day of the plan year beginning after the date of the acquisition or disposition. See IRC section 410(b)(6)(C)

- This special rule only applies if there has been no significant change in the coverage of the plan (other than due to changes in the members of the group) during the transition period.