In designing a cross-tested plan or “rescuing” such a plan from nondiscrimination failure, one of the more overlooked “correction” tools is restructuring. Restructuring permits the practitioner to divide the plan into two or more component plans that can be tested separately for nondiscrimination. For example, the practitioner might restructure the plan so that younger highly compensated employees (HCEs) and older nonhighly compensated employees (NHCEs) are in a component plan while the older HCEs are in another component plan with the younger NHCEs. A practitioner might also add flexible family members (family members around whom the employer is not designing the plan) to the plan and then restructure the plan into component plans that facilitates passing nondiscrimination. With the use of restructuring, practitioners may be able to establish cross-tested plans for employer where such designs were thought not to work. The practitioner also may be able to use restructuring to reduce the employer contribution costs for a cross-tested plan. In this technical update, we will discuss the rules for using restructuring and provide some illustrations on how the technique works.

Previously, we issued Technical Updates on restructuring. We are reissuing the Technical Update with some additional calculations to demonstrate how the plan passes the nondiscrimination test. 

In order for a plan to test its component plans separately for nondiscrimination purposes, what requirements must the plan satisfy? 

The plan may test each component separately for nondiscrimination purposes if each component plan satisfies the coverage requirements (ratio percentage test or the average benefits test) as if it were a separate plan.  

Example. Corporation X maintains a profit sharing plan with W-2 compensation as its compensation definition. The plan has separate nonintegrated allocation formulas for its two offices (A and B). For 2012, X provided a 15% contribution for office A and a 3% contribution for office B. The nonexcludable employee data for the offices is below: 

·         Coverage ratio for office A: 60%/80% = 75%

·         Coverage ratio for office B: 40%/20% = 200% 

When looking at the entire plan, it does not satisfy the uniform allocation safe harbor. However, X may restructure the plan into two components (A and B). Since each component satisfies coverage, X may test the plans separately. Furthermore, since each plan provides a uniform allocation percentage, the components qualify for the nondiscrimination safe harbor.  Since the component plans are each nondiscriminatory, the plan as a whole is nondiscriminatory. 

Note: The plan could pass the general nondiscrimination test without restructuring. However, the benefit of restructuring is that each component plan satisfied the uniform allocation safe harbor.

If a plan is restructured into component plans, must the plan, as a whole, still satisfy the coverage requirements? Top heavy requirements? 

Yes. Yes. 

In restructuring a plan into component plans, do the regulations impose any restrictions on the criteria a plan may use in creating the components? 

No. The employer identifies component plans on the basis of employee groups. The employer may use any criteria it wishes to divide the plan into components (e.g., work site, job category, hourly or salaried compensation, business unit). The employer could even select the employee groups on an arbitrary basis. 

May the employer change the employee groups from year to year? 

Yes. 

May the plan include an employee in more than one component? 

No.  

May a 401(k) plan use restructuring to assist a plan in satisfying the ADP or ACP tests? May the 401(k) plan, nevertheless, use restructuring for the profit sharing portion of the plan?  

No. Yes. 

Must the plan have language to enable an employer to amend the plan into two components? 

No. Restructuring a plan into component plans is operational and it does not require any specific plan language. 

If a plan is restructured into component plans, may each component plan be tested on a different basis (e.g., one component tested on a benefits basis [cross-tested] and the other component tested on an allocation basis)? 

Yes. In fact, such a method often is useful in assisting a cross-tested plan with younger HCEs or older NHCEs in satisfying nondiscrimination.

Example. Corporation X (medical practice) has been maintaining an integrated profit sharing plan to which he contributed 5% of total compensation plus 5% above the integration level. Dr. A would like to increase his allocations to 415 limit ($51,000) without increasing his allocations for his staff. Previously, his TPA advised him that a cross-tested plan would not work because of his two older employees. The initial plan design proposal is as follows: 

·         Rate group testing: The midpoint % (NHCE concentration % = 80%) for the nondiscriminatory classification test = 30% - 8.55% rate group fails (25%; 1/1 HCE/ 1/4 NHCEs)

·         Average benefit percentage test – needs 70% fails (43.13%) 

A new consultant proposes to pay the spouse (age 45) $25,000 for the bookkeeping work she already is performing and add her to the plan (eligibility conditions may need to be amended).  Because her husband owns the practice, the spouse will be considered an HCE. The consultant also proposes to amend into a cross-tested plan with an allocation formula that places each participant in his/her own classification. The employer will make a 5% allocation for the spouse and her EBR will be 2.74%. The consultant will restructure the plan for nondiscrimination testing into two components (each with one HCE and two NHCEs) as follows: 

Component 1 

·         Rate group testing: The midpoint % (NHCE concentration % = 66%) for the nondiscriminatory classification test = 40.5% - 8.55% rate group passes (50%; 1/2 HCE/ 1/4 NHCEs)

·         Average benefit percentage test – passes (71.69%)

o    In performing the average benefit percentage test, the plan must include benefits of all plans (including component plans) maintained by the employer. 

Component 2 

5% Uniform allocation - passes

Note that each component satisfies coverage (1/2 HCEs – 50%/2/4 NHCEs – 50% = 100%) so the component plans may be tested separately for nondiscrimination. 

If one component satisfies nondiscrimination on a benefits basis (cross-tested) and another component satisfied nondiscrimination on an allocation basis, may the plan limit the minimum gateway requirements to the cross-tested component? 

No. The minimum gateway requirements will apply to the plan as a whole. 

May an employer restructure a plan into two or more components to facilitate qualifying as a uniform allocation safe harbor plan for nondiscrimination purposes? 

Yes.

May a plan use restructuring for purposes of the minimum participation requirements (DB plans)? 

No. Restructuring only applies for purpose of the nondiscrimination requirements. 

We will explain how to use restructuring in our live seminar Advanced Cross-Tested Plans: Adding More Tools. See details below.

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Upcoming Web Seminars
Same Gender Marriage: Take 2 - Encore presentation, October 1, 2013, 2:00 p.m. ET

403(b) Plans for 401(k) Practitioners - 3 parts, October 8-9-10, 2013, 2:00 p.m. ET each day

Fundamentals of 401(k) Plans - 7-part Web seminar series, Sept.-Oct. Titles of the 7 segments: eligibility and vesting; HCEs and the coverage test; ADP, ACP, catch-ups, 401(k) safe harbor; nondiscrimination, compensation, 415 limits; top-heavy testing and deductible contributions; controlled groups and participant loans; taxation and distribution, Roth. Bundled registration price is available. Not too late to register – If you miss some of the first segments but still want to register and bundle all 7 for the discounted fee, we offer a bundled combination of live and recorded segments. (Due to the inability to track participation, CE credits are not available for recorded Web seminars.) 

New Focused Topics for the Experienced Practitioner - 12-part Web seminar series, Sept.-Dec. Titles of the 12 segments: Average Benefit Test: The Other Coverage Test; Rehired Employees & Early Eligibility Provision; Coverage Testing with Related Employers; Form 5330 for Late Deposit of Deferrals; Ethics: A Principled Approach; Correcting Safe Harbor 401(k) Plan Failures; Fixing the Broken Plan Document; Dealing with Loan Defaults; An In-depth Look at HCEs; Deduction Limits and Contribution Timing; Partial Termination and Plan Termination; Forfeitures: Allocation Options. Bundled registration price is available. Not too late to register – If you miss some of the first segments but still want to register and bundle all 12 for the discounted fee, we offer a bundled combination of live and recorded segments. (CE credits are not available for recorded Web seminars.) 

For program details about upcoming Web seminars, and to register online: http://www.relius.net/events/events.aspx?Web 

Live Classroom Seminars
Advanced Cross-Tested Plans: Adding More Tools – September - October
Restructuring, Age/Service Schedules, Banding, Family Members, and More
Cross-tested profit-sharing and 401(k) plans are among the most popular plan designs today. They can aid a practitioner in tailoring a plan for the needs of a business and its workforce. But cross-testing is not a “one size fits all” design. There are many approaches to a cross-tested plan, with very different outcomes. And unless a practitioner understands all the tools available for the plan, the practitioner may well provide a plan that is less effective or more costly than it could or should be. SunGard’s new Advanced Cross-Tested Plans Workshop adds to the tools practitioners have available to assist their clients. See program details and register online here: www.relius.net/events/events.aspx?Seminar

401(k) Plans: Beyond the Basics – 6 Cities, September - October 
This practical, intermediate course will help enhance your 401(k) knowledge and update you on the most recent 401(k) plan guidance. Incorporating recent law changes, the program extends beyond the basics to cover special 401(k) testing rules and design options. Over the two days, we consider many issues and problem areas for which experienced 401(k) practitioners need to be prepared. Earn up to 13 hours of CE credits. Special offer to attendees of the 2012 and 2013 Fundamentals of 401(k) and Other Qualified Plans – get $150 off your registration fee. See details and register here: www.relius.net/events/events.aspx?Seminar

ERISA Workshop 2013 – 24 Cities - Registration Open!
The Supreme Court decision on the definition of marriage will have a profound effect on retirement plans in every state, including states which do not permit same-gender marriage. This is just one of the topics in this year’s ERISA Workshop from SunGard's Relius Education. From recent court battles to prohibited transactions, from compensation to recapture accounts, from unwritten corrections to attribution rules, SunGard's ERISA Workshop helps fill the critical knowledge gaps that plague even experienced retirement plan practitioners, gaps that can lead to potentially expensive or embarrassing corrections. The Workshop also keeps attendees up-to-date on the latest developments in the retirement plan world. See details and register here: www.relius.net/events/events.aspx?Seminar