What are the two ways to approach IRC 401(a)(4) nondiscrimination testing?

1. Safe Harbor approach

This can range from a plan design that is completely test-free to one that requires some annual testing

2.  General testing approach

This approach requires annual testing and focuses on the individual allocation or accrual rates of the participants. 

Cross-testing is a form of general testing.

Explain how certain contributions are tested separately for nondiscrimination purposes.

The requirement that certain contributions must be tested seperately is referred to mandatory disaggregation.

• Elective deferrals: ADP test
• After-tax employee contributions:  ACP test
• Mandatory contributions under a DP plan:  not under ACP test IRC 401(m).  They are tested under IRC 401(a)(4)
• Matching contributions: ACP
• QNEC: ADP & ACP test and nondiscrimination under IRC 401(a)(4)

What is a design-based safe harbor plan?

It is a plan deemed to provide nondiscriminatory contributions because the allocation formula is designed to produce uniform allocations rates (or rates that are deemed to be uniform).

What is a nondesign-based safe harbor plan?

The uniform points plan is the only type of this plan.  This plan design requires annual testing of the contributions to show IRC 401(a)(4) is satisfied, but the testing method is simpler than the general testing method used for non-safe harbor plans.

Identify some of the plan provisions that will not affect reliance on the IRC 401(a)(4) safe harbor.

• Entry dates
• Conditions on allocations (last day provision or minimum hours of service)
• Limits on allocations (ie. $10,000 max)
• Lower allocation for HCEs
• Multiple formulas (allocating 2 or more formulas: including top heavy, employer contributions and forfeitures)

What is permitted disparity and why is it considered nondiscriminatory?

It is a term used in IRC 401(1) for considering the employer's contribution to Social Security on behalf of a plan participant in determining whether the contributions or benefits under a qualified plan are nondiscriminatory.

It benefits the lower-paid employees and disfavors higher-paid employees.

Identify the types of plans that may and may not use permitted disparity.

May:

-Safe Harbor

-Profit Sharing

-Self employed individuals (only the ER contribution portion would apply if the self employed individual were a common law employee is taken into account)

May NOT:

-401k (ADP test)

-401m (ACP test)

-ESOP

What integration levels are permitted in plans?

Single dollar amount:  may be stated as a single dollar amount that applies in all plan years, so long as the dollar amount doesn't exceed the current taxable wage base.

Floating integration level:  may be defined by formula, as a % of the current taxable wage base.

What is the maximum disparity allowance?

Integration Level                              Max. Disparity % 

Taxable wage base (TWB)                           5.7%

>80% but <100% of TWB                           5.4%

>20% but <80% of TWB                             4.3%

20% or less of TWB                                    5.7%

Describe general testing and which types of plans use general testing?

It is the method of demonstrating that plan allocations or plan benefits are nondiscriminatory by dividing employees into rate groups, and then analyzing each rate group separately.  (Ratio % test or Average benefit test)

Plans that the safe harbor rule is failed or plans designed with the specific intention to use general testing.

What is another name for general testing?

Rate Group Testing

How are rate groups determined?

Once the allocations are converted into allocation rates or EBARs, the rate groups are then identified by reference to the rate of each HCE.  An HCE's rate group includes all employees (HCEs & NHCEs) who have a rate equal to or greater than HCE's rate.

What are the gateway requirements?

1/3 test (aka minimum allocation gateway):  the lowest permissible allocation rate for any NHCE that benefits under the plan is 1/3 of the highest allocation rate for any HCE benefiting.  1/3 is based on allocation rate, not IRC 415 compensation!

5% test:  if each NHCE receives an allocation that is no less than 5% of IRC 415 compensation, the gateway is deemed satisfied.

When do the gateway requirements apply to a plan?

I don't f'n know!!!! GDI, I hate this chapter!!!!! 

What is cross-testing?

When a defined contribution plan uses the benefits basis analysis to determine nondiscrimination.

Describe a new comparability allocation formula.

The tester is "crossing" the line between defined contribution and defined benefit plans to use an analysis that is normally used for the other type of plan.

What is an age-weighted plan and how do these plans satisfy nondiscrimination requirements?

It allocates the employer contributions and forfeitures on the basis of the normalization factors used to determine EBARs under the cross-testing method.

By allocating the contribution on the basis of the normalization factors, the plan is designed to produce the same EBAR for each participant.  If all EBARs are the same, only one rate group needs to be tested.