Question

18. XYZ has a noncontributory qualified profit sharing plan with 310 employees in total, 180 who are non-excludable (40 HC and 140 NHC). The plan covers 72 NHC and 29 HC. The NHC receive an average of 4.0% benefit and the HC receive 6.0%. Which of the following statements is (are) correct? 1. The XYZ company plan meets the ratio percentage test. 2. The XYZ company plan is not required to cover the lesser of 1) 40% of total employees, and 2) 50 employees. 3. The plan must and does meet the ADP test. 2? a. I only. b. 2 only. c. Both 1 and 2. d. 1, 2, and 3.

Can someone assist with this question?

Answer 1

Answer:

C.

Explanation:

The correct answer is C.

The plan does not have to meet the ADP test because it is a noncontributory plan.

The plan meets the ratio percentage test and the average benefits test.

Detailed working:

XYZ ratio percentage is 70.94% which is greater than the required 70% so it meets the ratio percentage test

Non-excludable Plan coverage нс (а) NHC (b) нC (с) NHC (d) Formula Number of employees HC %age getting coverage NHC %age getting coverage 40 140 29 72 (c/a) (d/b) (NHC %age getting coverage/HC %age getting coverage) 72.50% 51.43% Ratio percentage test 70.94% Number of non excludable NHCS/Total non excludables = b/(a+b) NHC concerntration %age 77.78% Average benefit Average benefit test 6.50% 4.50% 69.23% (NHC average benefit/HC average benefit)

The average benefits test has 2 parts:

.1. Non-discriminatory classification test

2. Average benefits percentage test

.1. Non-discriminatory classification test further has 2 parts: the reasonable classification and the nondiscriminatory classification.

For a reasonable classification test, under Treasury Regulation Section 1.410(b)-4(b), it determines reasonable classification such as the nature of salary, job category, etc. This information is subjective and is not provided in the question so we cannot determine it.

Coming to the nondiscriminatory classification test:

As can be seen from the above table, the NHC concentration percentage is 77.78%

From the chart in Income Tax regulations Section 1.401(b)-4(c)(4)(iv), we see that the safe harbor percentage for this concentration will be 36.5% and the unsafe harbor percentage will be 26.5%. Since the XYZ NHC concentration percentage is higher than the safe harbor percentage, the plan's classification satisfies the safe harbor requirement.

2. Average benefits percentage test

As can be seen from the table above, the average benefits percentage for XYZ is 69.23% which is lower than the required 70%. So, XYZ fails the average benefits test.

ADP tests are applicable only for 401(k). This is not a 401(k) plan so the ADP test is not required.