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  #1  
Old 12-22-2007, 11:02 PM
student_actuary student_actuary is offline
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Default average benefits percentage test

I have a question on the calculation of average benefits % for aggregated DB/DC plans. Its a cash balance plan aggregated with 401(k) PS plan. In the calculation of ABP, do we also have to include the deferrals in the DC calculations.

eg my plan has match, profit sharing and now cash balance.

Do I need to include the deferral amount for each emplyoee along with the match, PS and cash balance contributions and then calculate the average benefits percentage. Or is it safe to only count match, PS and cash baalnce contributions and exclude the deferral. Last years calculations by the prior analyst show that he does NOT add in the deferral while calculating the ABP.


Help!
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  #2  
Old 12-23-2007, 11:56 AM
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i think you can include deferrals. they usually help the test, so might as well include them
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  #3  
Old 12-23-2007, 02:56 PM
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I don;t have the regs in front of me and don't deal with that frequently, but I beleive the 401(k) portion (i.e. employee elective deferrals) must be mandatorily disaggregated and can not be included in the ABP test.

Take a look at the Gray Book (questions from EA meetings to which the IRS(?) provides some guidance). There is a question that deals with it. I can get a more specific reference next week when I go back to work.
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  #4  
Old 12-24-2007, 02:23 AM
student_actuary student_actuary is offline
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See what I found:


PART TWO THE AVERAGE BENEFIT PERCENTAGE TEST Regs 1.410(b)-5
Once a plan satisfies the nondiscriminatory classification test, it then must satisfy the average benefit percentage (ABPT) test. The ABPT is satisfied if the average benefit percentage (ABP) of the NHCEs is at least 70 percent of the ABP of the HCEs. To perform this test, the employer must determine a benefit percentage for each nonexcludable employee. All qualified plans, including 401(k) plans and ESOPs, must be tested together. The only amounts excluded are after-tax contributions; thus, even elective deferrals are considered part of this test.


Source of this: http://www.mhco.com/Commentary/2004/..._test51304.htm


So looks like we have to include deferrals???
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Old 12-24-2007, 03:06 PM
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Quote:
Originally Posted by student_actuary View Post
So looks like we have to include deferrals???
Yes, that is correct. The 401(k) deferrals are included when you do the 410(b) average benefits percentage test.

For non-discrimination testing purposes under 401(a)(4), you exclude the 410(k) deferrals. The reason is that the deferrals are tested in a completely different manner. The deferrals have to pass the ADP / ACP test.

If you want more overview of non-discrimination topics, you can download last year's EA-2B seminar overheads. This page has links for both the 2007 EA-2A and EA-2B seminar overheads.
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Old 12-24-2007, 03:51 PM
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For non-discrimination testing purposes under 401(a)(4), you exclude the 410(k) deferrals. The reason is that the deferrals are tested in a completely different manner. The deferrals have to pass the ADP / ACP test.
Thanks Rick, that's what I was thinking about.
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Old 01-04-2008, 01:52 AM
student_actuary student_actuary is offline
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ONe of our clients has a proposed 401(k) - profit sharing plan which works as follows:

Match 4% for all, PS 4% for all

Owner and daughter defer maximum 15,500. Owner makes 400,000 but daughter makes only 20000 (out of which she defers 15,500). The daughters deferral % is very high so she really messes up the ADP test. I tried reading up on some safe harbor tests that would allow this situation. I read someplace that the maximum deferral permitted is 10,000 (or 6.5% of compensation capped at 160,000 ........something like that)

Can someone direct me to the correct place....I couldn't find much on this in Rick's EA2B overheads either.

Thanks all!
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Old 01-04-2008, 08:38 AM
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If everyone benefits why are you completing the ABP test for 410(b)? Wouldn't you automatically pass the ratio percentage test?

As for where to find info on the ADP test, do you have access to the code and regulations? I usually try to start with a summary from somewhere (like the ERISA outline book or Pension answer book) but almost always read the regs for clarification (or obfucation depending on the reg )
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Old 01-04-2008, 11:55 AM
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Quote:
Originally Posted by student_actuary View Post
ONe of our clients has a proposed 401(k) - profit sharing plan which works as follows:

Match 4% for all, PS 4% for all

Owner and daughter defer maximum 15,500. Owner makes 400,000 but daughter makes only 20000 (out of which she defers 15,500). The daughters deferral % is very high so she really messes up the ADP test. I tried reading up on some safe harbor tests that would allow this situation. I read someplace that the maximum deferral permitted is 10,000 (or 6.5% of compensation capped at 160,000 ........something like that)

Can someone direct me to the correct place....I couldn't find much on this in Rick's EA2B overheads either.

Thanks all!
Go to the IRS web site and the Retirement Section. You are mixing 401k rules with SIMPLEs, a specialized IRA account.
Download the IRS publication 560 to get started. Also Pub 590 is useful.

Safe-harbor 401k plans come in more than one form. Look in 401(k) of the IRC to see the basics.
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