Compliance Case Studies in Performing Tests & Analyzing the - PowerPoint PPT Presentation

When Testing Gets Tough (the tough get testing) Compliance Case Studies in Performing Tests & Analyzing the Results Presented By: Jane Nickalls & Andy Schommer

Agenda • Preparation before testing • 410b Coverage Test • ADP/ACP Test • General Test • Top Heavy Test 2

Review before testing • The plan document • The census data • Run the data scrub and review results, including: • Eligibility report • HCE/Key report • Run the allocation and review the reports • Make sure overrides are selected if you are uploading employer contributions • If the plan is top heavy, code as such 3

Coding the ftw Software – Tasks Menu • If uploading employer contributions – set appropriate override e.g. ‘Match allocation manual override’ • If top heavy code as ‘Top Heavy as of the Determination Date’ (first year only)

Highly Compensated Employees (HCEs) • HCE ‐ satisfies one of the qualifications below: • Ownership – owns more than 5% of the employer or a related employer, in either the current or prior plan year, or • Compensation – compensation from the prior plan year is greater than the indexed dollar amount for that plan year ($120,000.00 in 2017 & 2018) • Be sure to check the plan document to determine if top paid group has been elected 5

Key Employees • Key – satisfies one of the qualifications below. • Ownership • Owns more than 5% of the employer or a related employer, during the determination period, or • Owns more than 1% of the employer or a related employer, during the determination period, and earns more than $150,000.00 (not indexed). • Officer status • Is an officer and earns more than the indexed dollar amount ($175,000.00 in 2017 & 2018) • Determination period is the plan year that includes the determination date – generally the last day of the prior plan year 6

410(b) Coverage Test

410(b) Coverage Test Overview • 410(b) Coverage Test – ensures the plan benefits a non ‐ discriminatory percentage of NHCEs • How does a plan satisfy the 410(b) coverage rules? • Must pass either the Ratio Percentage Test OR the Average Benefits Test • The ratio percentage test compares the percentage of NHCEs benefitting to the percentage of HCEs benefitting, for each source • If the ratio percentage test fails, the plan may have the option to use the average benefits test (check plan document) • The average benefits test considers the amount of benefit rather than the number of persons benefitting. There are two parts of the average benefits test, BOTH must pass. • The Nondiscriminatory Classification Test • The Average Benefit Percentage Test 8

410(b) Ratio Percentage Test Steps 1. Determine Non ‐ Excludable employees 2. Determine Benefitting employees 3. Divide Benefitting NHCEs by Non ‐ Excludable NHCEs 4. Divide Benefitting HCEs by Non ‐ Excludable HCEs 5. Divide NHCE ratio (3) by HCE ratio (4) = Ratio Percentage 6. If Ratio Percentage >= to 70%, PASS, otherwise FAIL 9

Excludable Employees for 410(b) • Who is excluded from the coverage tests? • Anyone who has not met eligibility due to age or service requirements • Union members or nonresident aliens • Those who terminated, worked 500 or fewer hours AND did not benefit due to termination • Potential issues for the ratio percentage test: • Plans with a last day rule, 1000 hours requirement or exclusions due to class would be potentially problematic as they are not included in the ‘benefitting’ count, but are included in the ‘non ‐ excludable’ count 10

Benefitting Employees for 410(b) • Deferrals • If a nonexcludable employee is eligible to defer, they are considered benefitting employees for purposes of the elective deferral portion of the 410(b) test, even if they did not actually make any deferrals • Match • If a nonexcludable employee is eligible to defer and eligible to receive a match allocation, that employee is a benefitting employee as applicable to the match portion of the 410(b) test, even if they did not make any deferral contributions • Nonelective • If a nonexcludable employee receives a nonelective contribution, then that employee is considered to be benefitting for the nonelective section 11

Ratio Percentage Test (Example 1) 1. Determine Non ‐ Excludable employees • Non ‐ excludable NHCEs = 10 and non ‐ excludable HCEs = 3 2. Determine Benefitting employees • Benefitting NHCEs = 8 and benefitting HCEs = 3 3. Divide Benefitting NHCEs by Non ‐ Excludable NHCEs • 8/10 = 80% for the NHCE ratio 4. Divide Benefitting HCEs by Non ‐ Excludable HCEs • 3/3 = 100% for the HCE ratio 5. Divide NHCE ratio (step 3) by HCE ratio (step 4) = Ratio Percentage • 80%/100% = 80% for the ratio percentage 6. If Ratio Percentage >= to 70%, PASS, otherwise FAIL • 80% is more than 70%  PASS . 12

Ratio Percentage Test – ftw Software • ftwilliam.com Compliance Module – screen shot below shows the 410(b) Ratio Percentage Test passing • Test is run as part of the ‘Combined Test’ • Green check icon indicates all the tests have passed • Detailed results show breakdown by source 13

Ratio Percentage Test (Example 2) 1. Determine Non ‐ Excludable employees • Non ‐ excludable NHCEs = 10 and non ‐ excludable HCEs = 3 2. Determine Benefitting employees • Benefitting NHCEs = 4 and benefitting HCEs = 3 3. Divide Benefitting NHCEs by Non ‐ Excludable NHCEs • 4/10 = 40% for the NHCE ratio 4. Divide Benefitting HCEs by Non ‐ Excludable HCEs • 3/3 = 100% for the HCE ratio 5. Divide NHCE ratio (step 3) by HCE ratio (step 4) = Ratio Percentage • 40%/100% = 40% for the ratio percentage 6. If Ratio Percentage >= to 70%, PASS, else FAIL • 40% is less than 70%  FAIL. * changes from example 1 are in red 14

What if the Ratio Percentage Test Fails? • Plan has to then pass the 410(b) Average Benefit Test (two part test, both must pass) • Reasonable Classification Test (also a two part test; both must pass) • Average Benefit Percentage Test 15

410(b) Average Benefit Test • Reasonable Classification Test (two part test; both must pass) • Reasonable classification requirement, and • Nondiscriminatory classification test (two part test, only one must pass) • The safe harbor percentage test; or • The facts ‐ and ‐ circumstances test (two part test, both must pass) • The unsafe harbor percentage test, and • The facts ‐ and ‐ circumstances test • Average Benefit Percentage Test 16

410(b) Average Benefit Test Reasonable classification requirement; AND Safe harbor percentage test; OR Reasonable Classification Test; AND Unsafe harbor Non ‐ discriminatory percentage test; AND classification test Facts ‐ and ‐ circumstances test Facts ‐ and ‐ circumstances test Average Benefits Percentage test 17

Reasonable Classification Test (Part 1): Reasonable Classification Requirement • This looks at whether the classification of employees that are eligible to participate in the plan is: • Reasonable • Identified in the plan document • Uses clear and objective criteria • Permissible Classification Examples • Job categories (e.g. interns, janitors, teachers, etc.) • Type of compensation (e.g. hourly or salary) • Location • Not Permissible Classification Examples • Employee names, age, gender, hair color  18

Reasonable Classification Test (Part 2): Nondiscriminatory Classification Test • Nondiscriminatory classification test (two part test, only one must pass) • The safe harbor percentage test; or • The facts ‐ and ‐ circumstances test 8/27/2018 19

Nondiscriminatory Classification Test – Safe Harbor Percentage Test 1. Determine the NHCE Concentration Percentage 2. Determine Safe Harbor and Unsafe Harbor Percentages 3. Compare the Ratio Percentage (from the Ratio Percentage Test) to the Safe Harbor Percentage • If the ratio percentage test results are greater than or equal to the safe harbor percentage, then the nondiscriminatory classification test is satisfied, and we can move on to the average benefit percentage test • If the ratio percentage test results are less than the safe harbor percentage, then the Safe Harbor Percentage Test fails 20

Safe Harbor Percentage Test Example 1. Determine the NHCE Concentration Percentage • NHCE concentration percentage = # of NHCEs / # of nonexcludable employees • # of NHCEs = 7 • # of non ‐ excludable employees = 10 • NHCE concentration % = 7/10 = 70% 2. Determine Safe Harbor and Unsafe Harbor Percentages • Safe Harbor % = 42.50% • Unsafe Harbor % = 32.50% 3. Compare the Ratio Percentage to the Safe Harbor Percentage • Using a Ratio Percentage of 40% • 40% is less than 42.50%, so this test FAILS 21

Safe Harbor & Unsafe Harbor Percentages • NHCE concentration percentage = # of NHCEs / # of nonexcludable employees • Use table to determine Safe Harbor and Unsafe Harbor Percentage 22

410(b) Average Benefit Test • Reasonable Classification Test (two part test; both must pass) • Reasonable classification requirement, and • Nondiscriminatory classification test (two part test, only one must pass) • The safe harbor percentage test; or • The facts ‐ and ‐ circumstances test (two part test, both must pass) • The unsafe harbor percentage test, and • The facts ‐ and ‐ circumstances test • Average Benefit Percentage Test 23