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

Transcription

1 401(a)(26), Top Heavy, and Coverage Basics for Defined Benefit Plans Lauren R. Okum, ASA, EA, MAAA, MSPA Owner and Actuary, Premier Actuarial Solutions Page 0 1

2 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 midsized 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. Page 1 2

3 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 Page 2 3

4 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 Page 3 4

5 Definitions Excludable employees (continued) Employees who have not yet met the plan s age and service 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 ): 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) Page 4 5

6 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 Page 5 6

7 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 Page 6 7

8 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 Owner attribution rules under 318 apply [See next slide] Page 7 8

9 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 Page 8 9

10 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 Owner attribution rules under 318 apply 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 Page 9 10

11 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 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 Page 10 11

12 401(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 Page 11 12

13 401(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 Page 12 13

14 401(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 10 th 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 Page 13 14

15 401(a)(26): Frozen Plans 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 Page 14 15

16 401(a)(26): Frozen Plans 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 Page 15 16

17 401(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 ) 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 Page 16 17

18 401(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 Page 17 18

19 401(a)(26): Accrual Rates 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 Page 18 19

20 401(a)(26): Accrual Rates 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 = Accrual rate for participant age 30 Accrual = $600 * (1.05) = $18.79 Accrual rate = $18.79 * 12 $40,000 = 0.56% meaningful Accrual rate for participant age 40 Accrual = $600 * (1.05) = $11.54 Accrual rate = $11.54 * 12 $40,000 = 0.34% not meaningful Page 19 20

21 401(a)(26): Accrual Rates Cash Balance Credit as a % of Pay Amount Age 1.50% 2.00% 2.50% 3.00% Needed % 0.75% 0.93% 1.12% 1.34% % 0.71% 0.89% 1.07% 1.40% % 0.68% 0.85% 1.02% 1.47% % 0.64% 0.81% 0.97% 1.55% % 0.61% 0.77% 0.92% 1.62% % 0.58% 0.73% 0.88% 1.70% % 0.56% 0.70% 0.84% 1.79% % 0.53% 0.66% 0.80% 1.88% % 0.50% 0.63% 0.76% 1.97% % 0.48% 0.60% 0.72% 2.07% % 0.46% 0.57% 0.69% 2.17% % 0.43% 0.54% 0.65% 2.28% % 0.41% 0.52% 0.62% 2.39% % 0.39% 0.49% 0.59% 2.51% % 0.37% 0.47% 0.56% 2.64% % 0.36% 0.45% 0.54% 2.77% Accrual rates may vary based on actuarial equivalence and Normal Retirement Age Page 20 21

22 401(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 Page 21 22

23 401(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 nonattorneys but excludes non-partner attorneys (e.g. associates) Page 22 23

24 416: 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 Page 23 24

25 416: Top Heavy Basics 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) Page 24 25

26 416: Top Heavy Basics DC account balances Page 25 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 26

27 416: Top Heavy Basics Add back: Any distributions during the year; and In-service distributions for the last 5 years (including terminated plans) Page 26 27

28 416: Top Heavy Basics 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 Page 27 28

29 416: Top Heavy Basics 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 T-23 Page 28 29

30 416: 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 nonkey 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) Page 29 30

31 416: 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 Page 30 31

32 416: Top Heavy in DB Plan 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 Page 31 32

33 416: Top Heavy in DB Plan 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 Page 32 33

34 416: 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 Page 33 34

35 416: Top Heavy in DC Plan 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. Page 34 35

36 416: Top Heavy in DC Plan 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 Page 35 36

37 416: 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 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 Page 36 37

38 416: Top Heavy Exemptions Scenario 2 Plan offers elective deferrals, safe harbor match, and discretionary non-elective contributions Employer does make non-elective contribution Plan is not exempt from top heavy for the year Scenario 3 Plan offers elective deferrals, safe harbor match, and discretionary non-elective contributions Employer does not make non-elective contribution but forfeitures are reallocated to participants in the same manner as discretionary nonelective contributions Plan is not exempt from top heavy for the year Page 37 38

39 416: Top Heavy Exemptions Scenario 4 Plan offers elective deferrals, safe harbor match, and discretionary non-elective contributions 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) Page 38 39

40 416: Top Heavy in Combo Plans When a participant benefits in both the DB plan and DC plan, then special rules apply Treas. Reg 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 , 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 , that the combined plans are providing benefits at least equal to the DB minimum Provide a 5% DC allocation used in most combo plans Page 39 40

41 416: Top Heavy in Combo Plans Must the participant work 1,000 hours? Must the participant work on the last day of the plan year? Defined Benefit Yes No Defined Contribution No Yes 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 Page 40 41

42 416: Top Heavy in Combo Plans Must the participant work 1,000 hours? Must the participant work on the last day of the plan year? Defined Benefit Yes No Defined Contribution No Yes 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 Page 41 42

43 416: Top Heavy in Combo Plans Make sure both DB and DC plan document coordinate top heavy provisions need to amend DC plan document if adding a DB plan Page 42 43

44 410(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 Page 43 44

45 410(b): Coverage Basics 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 Page 44 45

46 410(b): Coverage Basics 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 Page 45 46

47 410(b): Coverage Basics 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 Page 46 47

48 410(b): Coverage Basics 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 Page 47 48

49 410(b): Coverage Basics 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 Page 48 49

50 410(b): Coverage Basics 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): 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 Page 49 50

51 410(b): Coverage Basics 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 Page 50 51

52 410(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 Page 51 52

53 410(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 Page 52 53

54 410(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 Page 53 54

55 410(b): Ratio Percentage Test 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% Page 54 55

56 410(b): Ratio Percentage Test 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% Page 55 56

57 410(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) Page 56 57

58 410(b): Average Benefits Test 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 Page 57 58

59 410(b): Average Benefits Test 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% Safe harbor % = 50% - ¾ (66% 60%) = 45.50% Unsafe harbor % = 40% - ¾ (66% 60%) = 35.50% Page 58 59

60 410(b): Average Benefits Test If Ratio Percentage is: At least 70% At least 50% Less than 20% Then: Plan passes the Ratio Percentage Test Plan passes the Easier Ratio Percentage Test of the NCT 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 Page 59 60

61 410(b): Average Benefits Test 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 Page 60 61

62 410(b): Average Benefits Test 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 Page 61 62

63 410(b): Average Benefits Test Average Benefits Percentage Test (continued) Example Given EBAR for HCE1 = 19.94% EBAR for NHCE1 = 11.07% EBAR for NHCE2 = 22.17% EBAR for NHCE3 = 24.21% EBAR for NHCE4 = 11.90% Average EBAR for HCEs = 19.94% 1 = 19.94% Average EBAR for NHCEs = (11.07% % % %) 4 = 17.34% Ratio = 17.34% 19.94% = 86.95% ABPT passes since ratio 70% Page 62 63

64 Questions? Thank you! Page 63 64