401(a)(26), top heavy, and coverage basics for …...1 page 0 401(a)(26), top heavy, and coverage...

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401(a)(26), Top Heavy, and Coverage Basics for Defined Benefit Plans

Lauren R. Okum, ASA, EA, MAAA, MSPA

Owner and Actuary, Premier Actuarial Solutions

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Lauren R. Okum, ASA, EA, MAAA, MSPA Owner and Actuary, Premier Actuarial Solutions

Lauren is the founder of Premier Actuarial Solutions, an actuarial

firm that specializes in the design and administration of defined

benefit plans. She has practiced in the pension actuarial arena

for over 20 years. She currently focuses on the small and mid-

sized markets, consulting with employers maintaining defined

benefit plan as well as other third-party administrators that are

looking to outsource their actuarial needs.

Lauren is an Associate of the Society of Actuaries, an Enrolled

Actuary, a Member of the Academy of Actuaries, and a Member

of the Society of Pension Actuaries. She graduated summa cum

laude in Actuarial Science from the University of Illinois and

attended Harvard Business School for her MBA.

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Introduction

• §401(a)(26) requires a plan to cover a sufficient number

of people minimum participation

• §416 requires a plan that primarily benefits “key

employees” to provide a minimum level of benefits and/or

contributions to non-key employees top heavy

• §410(b) requires a plan to cover a sufficient number of

Non-Highly Compensated Employees (NHCEs)

coverage

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Definitions

• Excludable employees

• Employees who have not yet met the plan’s age and service

requirements;

• Non-resident aliens with no U.S. income;

• Employees subject to collective bargaining;

• Certain terminated employees with ≤ 500 hours; and

• Employees of other QSLOBs

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Definitions

• Excludable employees (continued)


requirements

• If plans have different eligibility requirements, use the most liberal

eligibility

• Example: PSP has 6 month eligibility, and CBP has 2 year eligibility

• If testing the plans together, only exclude employees who have less than 6

months of service

• If testing the plans separately, then look at each plan’s respective eligibility

requirements

• Example for ABPT (Gray Book 2002-43): Immediate eligibility for

elective deferrals, and 21/1 for profit sharing contribution

• Must test plans together and include everyone (if not using the Otherwise

Excludable Employees rule)

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Definitions

• Excludable employees (continued)

• Terminated employees with ≤ 500 hours only excludable if:

• Plan requires minimum hours and/or EOY employment to receive

benefit/allocation; and

• Employee

• Is eligible to participate in the plan;

• Does not benefit under the plan for the year;

• Fails to receive benefit/allocation solely because of above

requirement(s); and

• Terminates with no more than 500 hours of service during the year

• Exclusion of such terminees from testing is elective and

consistency is only required within a plan year

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Definitions

• Otherwise Excludable Employees

• IRC § 410(a)(1) identifies the statutory eligibility requirements:

• May exclude employees who have not attained age 21

• May exclude employees who have not completed 1 year of service

(2 years of service if 100% immediate vesting)

• IRC § 410(a)(4) requires plan participation to begin no later than

the earlier of:

• First day of plan year after the employee satisfied the §410(a)(1)

statutory eligibility requirements; or

• 6 months after completion of the §410(a)(1) statutory eligibility

requirements

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Definitions

• A key employee is an employee who at any time during

the determination year was:

• An owner of more than 5%;

• Owner attribution rules under §318 apply

• An owner of more than 1% with annual compensation in excess

of $150,000; or


• [See next slide]

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Definitions

• Key employee (continued)

• An officer with annual compensation exceeding $130,000,

adjusted for cost of living ($170,000 in 2015)

• To be an officer, an employee does not need the title of an officer,

but rather has the same authority as an officer

• Duties

• Term of position

• Extent of authority

• The number of officers who can be considered key employees is

limited to the greater of:

• 10% of the total number of employees, subject to a maximum of 50

officers; or

• Three officers

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Definitions

• A Highly Compensated Employee (HCE) is an employee

who:

• During the current or prior plan year owned more than 5% of the

employer; or


• Earned in excess of $120,000 (2015) in the prior year

• Adjusted annually for cost of living.

• Use the limit for the lookback year – e.g. use $120,000 in 2015 for

determining HCE status for 2016

• Use the limit in effect at the beginning of the plan year – e.g. for

determining HCE status for July 1, 2015 through June 30, 2016

status, use the 2014 HCE compensation limit

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Definitions

• Highly Compensated Employee (continued)

• Under IRC § 414(q)(3), the employer may make a top paid

group election

• Restrict the compensation test to only those employees who:

• Earned in excess of $120,000 (2015) in the prior year; and

• Were one of the top 20% highest paid employees for the lookback year

• Notice 97-45

• Same election must apply for all plans of the employer that begin with or

within the same calendar year

• Election must be stated in the plan document only if the plan document

contains the definition of HCE

• Applies to plan years in which it is effective and to all subsequent plan years

until it is revoked

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§401(a)(26): Basics

• Under §401(a)(26), a standalone DB plan (or CB plan)

must provide “meaningful benefits” to lesser of:

• 40% of the non-excludable employees; or

• 50 employees

• But, in no event, less than 2 employees, unless there is only one

non-excludable employee

• It doesn’t matter if benefiting participants are HCEs or

NHCEs

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§401(a)(26): Exemptions

• A plan is exempt from §401(a)(26) if it meets either of 2

conditions:

• No Highly Compensated Employee benefits rule

• Plan is not top heavy;

• Plan must not benefit any HCE or former HCE; and

• Plan is not aggregated with another plan in order to satisfy

§401(a)(4) (other than the Average Benefit Percentage Test)

• Underfunded frozen plan rule

• Plan is covered by the PBGC or plan is not top heavy;

• Plan does not have sufficient assets to pay all benefits; and

• Plan is frozen

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§401(a)(26): Frozen Plans

• If plan is frozen but does not meet the exceptions, then it

must pass testing under the prior benefit structures rule

• Testing may be done only on current employees or on the

combination of current and former employees

• Plan may exclude employees who terminated prior to the 10th

calendar year prior to the calendar year in which the current plan

year begins

• Plan may exclude employees who never met the plan’s age and

service requirements

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• Test whether they have meaningful accrued benefits (i.e. without

regard to the fact that they have no current year accrual)

• 40% of the non-excludable employees; or

• 50 employees

• Under a special test, a plan is deemed to satisfy §401(a)(26) for

former employees if the plan benefits at least five former

employees, and if either:

• More than 95% of all former employees with vested accrued benefits

benefit under the plan for the plan year; or

• At least 60% of the former employees who benefit under the plan for

the plan year are former NHCEs

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• “Benefit” vs. “benefiting”

• “Benefiting” is a well-defined term; “benefit” is not

• Logically, a former employee who “benefits” means that the

individual is owed a benefit (i.e. previously earned and not yet paid

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§401(a)(26): Meaningful Benefits

• What is a “meaningful benefit”?

• Regulations provide no bright line test to determine if benefits

being provided are meaningful

• Instead say based on “facts and circumstances”

• 0.5% accrual (not CB credit) is considered “meaningful”

• In a document titled MEMORANDUM FOR MANAGER, EP

DETERMINATIONS QUALITY ASSURANCE issued in June of

2002, the Service implied that a current benefit accrual of 0.5% of

compensation is meaningful

• Consistent with “Alert Guidelines No. 5A on Coverage and

Nondiscrimination Testing For Defined Benefit Plans” (Revised 4-

2000) at Section III

• In MEMORANDUM FOR MANAGER, EP DETERMINATIONS &

QUALITY ASSURANCE on 7/17/2007, IRS confirms that benefit

accrual of 0.5% per year of participation or service is “meaningful”

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§401(a)(26): Accrual Rates

• Accrual Rate

• Increase in benefit ÷

• Testing service ÷

• Testing compensation

• A traditional DB plan that has a benefit formula of 0.5% of

average compensation times credited service has a

“meaningful benefit”

• For a CB plan, the increase in benefit is the cash balance

credit projected to NRA and converted to an annuity

Current Age Normal Retirement Age

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• Defined benefit example

• Given

• Prior year accrued benefit = $200/month

• Current year accrued benefit = $250/month

• Compensation = $40,000

• Accrual rate = $50 * 12 ÷ $40,000 = $600 ÷ $40,000 = 1.5%

meaningful

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• Cash balance example:

• Given

• $600 cash balance credit (1.5% of compensation)

• 5% interest crediting rate

• Compensation = $40,000

• Normal Retirement Age = 62

• Monthly annuity conversion factor at age 62 = 152.15731

• Accrual rate for participant age 30

• Accrual = $600 * (1.05)32 ÷ 152.15731 = $18.79

• Accrual rate = $18.79 * 12 ÷ $40,000 = 0.56% meaningful

• Accrual rate for participant age 40

• Accrual = $600 * (1.05)22 ÷ 152.15731 = $11.54

• Accrual rate = $11.54 * 12 ÷ $40,000 = 0.34% not meaningful

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Accrual rates may vary based on actuarial equivalence and Normal Retirement Age

Cash Balance Credit as a % of Pay Amount

Age 1.50% 2.00% 2.50% 3.00% Needed

30 0.56% 0.75% 0.93% 1.12% 1.34%

31 0.53% 0.71% 0.89% 1.07% 1.40%

32 0.51% 0.68% 0.85% 1.02% 1.47%

33 0.48% 0.64% 0.81% 0.97% 1.55%

34 0.46% 0.61% 0.77% 0.92% 1.62%

35 0.44% 0.58% 0.73% 0.88% 1.70%

36 0.42% 0.56% 0.70% 0.84% 1.79%

37 0.40% 0.53% 0.66% 0.80% 1.88%

38 0.38% 0.50% 0.63% 0.76% 1.97%

39 0.36% 0.48% 0.60% 0.72% 2.07%

40 0.34% 0.46% 0.57% 0.69% 2.17%

41 0.32% 0.43% 0.54% 0.65% 2.28%

42 0.31% 0.41% 0.52% 0.62% 2.39%

43 0.29% 0.39% 0.49% 0.59% 2.51%

44 0.28% 0.37% 0.47% 0.56% 2.64%

45 0.27% 0.36% 0.45% 0.54% 2.77%

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§401(a)(26): Floor Offset Plans

• §1.401(a)(26)-5: May disregard the offset portion of the

benefit formula if the following requirements are met:

• The contributions or benefits under the other plan that offset the

benefit were accrued under such plan;

• The employees benefit under the other plan on a reasonable and

uniform basis; and

• The contributions or benefits used for the offset are not used to

offset or reduce benefits under any other plan or formula

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§401(a)(26): Plan Design

• Plan design options

• Give everybody at least a meaningful benefit;

• Simplest approach

• Example: 0.5% of average compensation times credited service

• Easy to do with traditional DB plans; difficult to do with CB plans

• Limit the meaningful benefit to only 40% of eligible employees; or

• Often done with CB plans

• Look at the demographics and develop a formula that will likely pass

over the next several years

• Limit eligibility

• Often done in law firms such that plan covers partners and non-

attorneys but excludes non-partner attorneys (e.g. associates)

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§416: Top Heavy Basics

• Top heavy plans are required to meet:

• Minimum vesting requirements; and

• Minimum benefit or contribution requirements

• Top heavy determination

• DB plans are top heavy when more than 60% of the present

value of accrued benefits as of the determination date are

attributable to key employees

• DC plans are top heavy when the aggregate account balances of

key employees exceed 60% of the total account balances as of

the determination date

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• DB present value of accrued benefits

• Determined based on “reasonable” actuarial assumptions

• Does not need to be the plan’s definition of actuarial equivalence

• Does not need to be the assumptions used for funding

• Often specified in the plan document

• Add back:

• Any distributions during the year; and

• In-service distributions for the last 5 years (including terminated

plans)

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• DC account balances

• Include:

• Employer contributions;

• Elective deferrals;

• After-tax contributions;

• Rollover contributions received prior to January 1, 1984;

• Related rollover accounts;

• Investment earnings credited to account balances; and

• Forfeitures

• Exclude:

• Unrelated rollover accounts;

• Accounts of terminated employees who did not work in determination

year; and

• Accounts of former key employees

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• Add back:

• Any distributions during the year; and

• In-service distributions for the last 5 years (including terminated

plans)

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• Required aggregation group

• Each plan in which at least 1 key employee participates (does not

need to be the same key employee)

• Any plan in which a key employee participates + any other plan

(including one with no key employees) that are permissively

aggregated to meet §410 and §401(a)(4)

• Permissive aggregation group

• Two or more plans when aggregated would also pass §410 and

§401(a)(4)

• If the required aggregation group is top heavy, then all of

the plans in the group are top heavy

• If a permissive aggregation group is not top heavy, then

all of the plans in the group are considered not top heavy

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• The determination date is:

• For a new plan, the last day of the first plan year

• For an existing plan, the last day of the preceding plan year

• For aggregated plans, determine the present value separately for

each plan as of each plan’s determination date and add together

• When plan years are the same, use the respective determination

date(s)

• When plan years are different, use the determination dates that fall

within the plan year

• 1.416-1 T-23

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§416: Top Heavy Vesting

• IRC § 416(b) requires top heavy plans to provide more

rapid vesting:

• 100% after 3 years of service (“3-year cliff”); or

• 20% after 2 years of service, increasing 20% each subsequent

year until 100% after 6 years (“6-year graded”)

• Top heavy vesting applies to all benefits accrued,

including benefits accrued before the plan was top heavy

• Top heavy vesting applies to all participants, even non-

key employees

• If plan ceases to be top heavy, then vesting schedule

may be changed back (though top heavy vesting

schedule is protected under IRC § 411(a)(10)

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§416: Top Heavy in DB Plan

• Must be provided to anyone who worked ≥ 1,000 hours;

no last day requirement

• Minimum benefit = 2% of (5-year) average compensation

times “years of service with the employer” (not to exceed

10)

• Years of service measured using accrual rules of IRC

§§411(a)(4)-(6)

• Years prior to plan effective date may be excluded

• Years when participant works < 1,000 hours may be excluded

• Years of service during which the plan was not top heavy can be

excluded

• Years of service in which no key employee benefited can be

excluded

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• Average compensation is measured over a period of consecutive

years (not exceeding 5) during which the participant had the

greatest aggregate compensation from the employer

• Only years counted in “years of service with the employer” above are

included in average

• Based on 415(c)(3) compensation

• Box 1 on the W-2 bumped up by any deferrals

• For the full year, not from date of participation

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• Example

• Plan is top heavy for all years

• Participant’s compensation and hours

• 2011: $40,000; 1,000+ hours

• 2012: $41,000; 1,000+ hours

• 2013: $42,000; 1,000+ hours

• 2014: $35,000; <1,000 hours

• 2015: $44,000; 1,000+ hours

• Average compensation = ($40K + $41K + $42K + $44K) / 4 =

$41,750

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§416: Top Heavy in DC Plan

• Must be provided to anyone who worked on the last day

of the plan year; no hours requirement

• If employee is eligible for any portion of the plan (e.g.

immediate 401(k) deferrals), then he is eligible for the top

heavy minimum

• Includes employees who are eligible for elective deferrals but

don’t make them

• Minimum allocation = 3% of 415(c)(3) compensation (or

lower percentage if highest key employee is under 3%)

• Box 1 on the W-2 bumped up by any deferrals

• For the full year, not from date of participation

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• Examples

• Bob, a key employee, receives a 2% profit sharing allocation. All

eligible, non-key participants must receive a 2% allocation.

• Bob, a key employee, receives a 10% profit sharing allocation. All

eligible, non-key participants must receive a 3% allocation.

• Bob, a key employee, defers 6% to his 401(k) plan. All eligible,

non-key participants must receive a 3% allocation.

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• Which contributions may be used to satisfy the minimum

contribution requirement?

• 3% non-elective safe harbor YES

• Discretionary profit sharing YES

• Employee pre-tax elective deferrals NO

• Employee after-tax contributions NO

• Matching contributions YES

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§416: Top Heavy Exemptions

• Under EGTRRA, plans are deemed to meet top heavy

requirement if:

• The plan meets ADP/ACP safe harbor with a non-elective

contribution or matching contributions; and

• The plan offers no contributions other than deferrals and a safe

harbor contribution

• Rev. Rul. 2004-13 offered further guidance

• Scenario 1

• Plan offers elective deferrals, safe harbor match, and discretionary

non-elective contributions

• Employer does not make non-elective contribution

• Plan is exempt from top heavy for the year

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• Scenario 2



• Employer does make non-elective contribution

• Plan is not exempt from top heavy for the year

• Scenario 3



• Employer does not make non-elective contribution but forfeitures are

reallocated to participants in the same manner as discretionary non-

elective contributions

• Plan is not exempt from top heavy for the year

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• Scenario 4



• Immediate eligibility for elective deferrals; 1-year eligibility for match

• Employer does not make non-elective contribution

• Plan is not exempt from top heavy for the year, since all of the

eligible NHCEs did not receive the match (and thus did not meet the

conditions of the ADP safe harbor)

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§416: Top Heavy in Combo Plans

• When a participant benefits in both the DB plan and DC

plan, then special rules apply

• Treas. Reg. §1.416-1 Q&A M-12 allow 4 permissible

methods of satisfying the top heavy minimum:

• Provide DB minimum only;

• Use a floor offset approach, pursuant to Rev Rul 76-259, under

which the DB plan provides the top heavy minimum and is offset

by the benefits provided under the DC plan

• Use a comparability analysis, pursuant to Rev Rul 81-202, that

the combined plans are providing benefits at least equal to the

DB minimum

• Provide a 5% DC allocation used in most combo plans

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• Terminated participants with < 1,000 hours need no top heavy

minimum in either plan

• Anyone who participates in both plans with ≥ 1,000 hours and

employed at year-end will need the combo plan minimum

Defined Benefit Defined Contribution

Must the participant

work ≥ 1,000 hours?

Yes No


work on the last day of

the plan year?

No Yes

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Subject to Gateway requirements

• Participants employed at year-end but have < 1,000 hours need 3%

minimum from the DC plan

• Terminated participants with ≥ 1,000 hours need combo plan

minimum

• Anyone (e.g. non-key HCEs) who does not participate in the DB plan

only needs the 3% minimum from the DC plan

Defined Benefit Defined Contribution


work ≥ 1,000 hours?

Yes No


work on the last day of

the plan year?

No Yes

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• Make sure both DB and DC plan document coordinate

top heavy provisions need to amend DC plan

document if adding a DB plan

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§410(b): Coverage Basics

• §410(b) requires that either:

• Plan satisfies the Ratio Percentage Test;

• Plan satisfies the Average Benefits Test;

• Plan does not benefit any HCEs; or

• The employer has no non-excludable NHCEs

• To determine the “plan” being tested, you start with a

plan

• The plan is then mandatorily disaggregated with certain

benefits within that plan, and then (maybe) permissively

aggregated with other plan(s) of the Employer

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• Mandatory disaggregation (1.410(b)-7(c))

• 401(k) plans must be separated from non-401(k) plans

• 401(m) plans must be separated from non-401(m) plans

• ESOPs must be separated from non-ESOPs

• Plans covering employees of a SLOB, if such employees are

treated as excludable

• Plans covering union employees must be separated from plans

covering non-union employees

• If the plan covers employees of more than one employer (i.e. a

multiple employer plan), those different employers are separated

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• Permissive aggregation (1.410(b)-7(d))

• Plans (or part of plans) must not be mandatorily disaggregated

• Plans must have the same plan year (not just the same plan year

end)

• Test as a single plan

• Single coverage test

• Single 401(a)(4) test

• Must use consistent testing methodology (i.e. benefits or contributions

basis)

• May use restructuring under §401(a)(4)

• Must test BRFs as a single plan

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• Special rule for the Average Benefits Percentage Test

(ABPT) (1.410(b)-7(e)): For purposes of ABPT only, the

plan being tested must:

• Include 401(k) plans, 401(m) plans, and ESOPs;

• Exclude union plans and plans of other QSLOBs (if doing ABPT

within a QSLOB); and

• Use plan years ending in the same calendar year

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• Example #1

• Employer maintains 2 plans:

• 401(k) profit sharing plan with 12/31 plan year end

• Cash balance plan with 6/30 plan year end

• Plans for testing (other than ABPT)

• 401(k) plan is disaggregated

• Profit sharing plan and cash balance plan may not be aggregated

because they have different plan years

• Plans for testing the ABPT

• All plans are aggregated

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• Example #2

• Employer maintains 2 plans:

• 401(k) profit sharing plan with 12/31 plan year end

• NEW cash balance plan with 12/31 plan year end

• Plans for testing (other than ABPT)

• If effective date of cash balance plan is 1/1, then plans may be

aggregated

• If effective date of cash balance plan is NOT 1/1, then plans may not

be aggregated because they have different plan years

• Plans for testing the ABPT

• All plans are aggregated, since they all have 12/31 plan year ends

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• Start with all common law employees of the employer,

including foreign employees

• Add leased employees who have worked for the

Employer for at least a year

• Subtract excludable employees (§1.410(b)-6):


requirements;

• Non-resident aliens with no U.S. income;

• Employees subject to collective bargaining;

• Certain terminated employees with ≤ 500 hours; and

• Employees of other QSLOBs

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• When the plan has more liberal eligibility, the employees

who could legally be excluded but are not are “Otherwise

Excludable Employees”

• Separate testing is optional. Split into 2 groups:

• 410(a) group

• Otherwise Excludable Employees group

• If there are no HCEs, then this group automatically passes. Don’t

need gateway contribution, for example

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§410(b): Who’s Benefiting

• An employee is benefiting only if the employee actually:

• Accrues an additional benefit in a DB plan; or

• Receives an allocation of contributions or forfeitures in a DC plan

• Special rule for 401(k)/(m) plans:

• Employee is considered benefiting if eligible to participate

• It does not matter if employee actually makes a deferral or

receives an employer match

• An employee is not benefiting if:

• The employee is not a plan participant;

• The employee’s benefit is frozen; or

• There are no contributions (or forfeitures) allocation to the

participant’s account in a profit sharing plan

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§410(b): Who’s Benefiting

• Exceptions:

• If DB formula caps service (e.g. 30 years) and the participant is at

the service cap, he is considered benefiting

• If the participant is at the 415 limit, he is considered benefiting

• A frozen DB plan automatically satisfies coverage

• All benefit accruals must have ceased

• If benefits increase because of increases in compensation or

because of 415 limit increases, the plan is NOT frozen

• A frozen DC plan automatically satisfies coverage

• Allocation of trust earnings is OK

• A discretionary profit sharing plan with no contributions (or

forfeitures) is treated like a frozen plan and therefore

automatically satisfies coverage

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§410(b): Ratio Percentage Test

• To satisfy the “Ratio Percentage Test”, a plan must have

a “Ratio Percentage” of at least 70%

• Ratio Percentage = NHCE ratio % ÷ HCE ratio %

• NHCE ratio % = number of NHCEs benefiting under the plan ÷ total

number of non-excludable NHCEs

• HCE ratio % = number of HCEs benefiting under the plan ÷ total

number of non-excludable HCEs

• For this purpose, the amount someone is benefiting is irrelevant

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• Example #1

• Company has 5 non-excludable HCEs and 10 non-excludable

NHCEs

• Plan benefits 4 HCEs and 6 NHCEs

• NHCE ratio % = 6 ÷ 10 = 60%

• HCE ratio % = 4 ÷ 5 = 80%

• Ratio Percentage = 60% ÷ 80% = 75%

• Plan passes since RP ≥ 70%

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• Example #2

• Company has 5 non-excludable HCEs and 10 non-excludable

NHCEs

• Plan benefits 4 HCEs and 5 NHCEs

• NHCE ratio % = 5 ÷ 10 = 50%

• HCE ratio % = 4 ÷ 5 = 80%

• Ratio Percentage = 50% ÷ 80% = 62.5%

• Plan fails since RP is < 70%

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§410(b): Average Benefits Test

• To satisfy the Average Benefits Test (ABT), the plan must

pass both:

• Nondiscriminatory classification test; and

• Reasonable classification test; and

• Easier Ratio Percentage Test

• Average Benefits Percentage Test (ABPT)

• Average benefits for NHCEs must be at least 70% of the average

benefits for HCEs

• Include 401(k) plans, 401(m) plans, and ESOPs

• Look at all plans of the employer with plan years ending in the same

calendar year (not just those with the same plan year)

• Few small plans rely on the ABT to pass §410(b)

• Small plans commonly need to pass ABPT to pass §401(a)(4)

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• Nondiscriminatory Classification Test – Part 1 of ABT

• Reasonable classification test

• Classification for identifying eligible employees must have some

reasonable business purpose

• Job function, location, salaried vs. hourly, etc. are all OK

• A list of names (or something having the same effect) or other arbitrary

selection is not OK

• Plans that satisfy the Ratio Percentage Test do not have to meet this

requirement (even if they are included in the ABPT)

• Easier Ratio Percentage Test

• Ratio Percentage must be ≥ safe harbor %; or

• Ratio Percentage must be between safe harbor % and unsafe harbor

%, and there are good facts and circumstances

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• Easier Ratio Percentage Test (continued)

• NHCE concentration percentage (CP) = % of non-excludable

employees who are NHCEs

• Safe harbor % = 50% - ¾ (CP – 60%), min 20%, max 50%

• Unsafe harbor % = 40% - ¾ (CP – 60%), min 20%, max 40%

• Example

• 6 non-excludable NHCEs, 3 non-excludable HCEs

• CP = 6 ÷ 9 = 66.667% 66%

• Safe harbor % = 50% - ¾ (66% – 60%) = 45.50%

• Unsafe harbor % = 40% - ¾ (66% – 60%) = 35.50%

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If Ratio Percentage is: Then:

At least 70% Plan passes the Ratio Percentage Test

At least 50% Plan passes the Easier Ratio

Percentage Test of the NCT

Less than 20% Plan fails the Easier Ratio Percentage

Test of the NCT

Is at least 20% but less than 50% Passing depends on safe harbor %

and unsafe harbor %, which depends

on the NHCE concentration

percentage

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• Average Benefits Percentage Test – Part 2 of ABT

• Average benefits for NHCEs must be at least 70% of the average

benefits for HCEs

• Average benefit for NHCEs = average of EBARs for non-excludable

NHCEs

• Average benefit for HCEs = average of EBARs for non-excludable

HCEs

• Count non-benefiting, non-excludable employees as zeroes in

averages

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• Average Benefits Percentage Test (continued)

• With limited exceptions, all plans are taken into account

• 401(k) elective deferrals included

• 401(m) matching contributions included

• Use plan years ending in the same calendar year

• Accrual or allocation rates (EBAR) used for ABPT =

• EBAR used for Rate Group Testing +

• EBAR for elective deferrals (ignoring catch-up) +

• EBAR for matching contribution

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• Average Benefits Percentage Test (continued)

• Example

• Given

• EBAR for HCE1 = 19.94%

• EBAR for NHCE1 = 11.07%




• Average EBAR for HCEs = 19.94% ÷ 1 = 19.94%

• Average EBAR for NHCEs = (11.07% + 22.17% + 24.21% +

11.90%) ÷ 4 = 17.34%

• Ratio = 17.34% ÷ 19.94% = 86.95%

• ABPT passes since ratio ≥ 70%

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Questions?

• Thank you!

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