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401k only - coverage failure

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3 replies to this topic

#1 M. Martin

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Posted 10 March 2007 - 03:05 PM

I have a take over plan (12/31 yr end) where the only contributions are 401k ctbs, the company hasn't made any employer contributions for serveral years. Due to an acquistion (over 2 years ago) there is a control group relationship with a company that is currently not a participating employer and does not have a separate plan.

In running the 410b test on an annual basis it fails. Is the snapshot testing method available?

If it's not available and the employer has to make an employer contribution are these their correction options:

1) Make a PS contribution to the covered NHCE's which allows the plan to pass the ABT. If they are making a QNEC because of a failed ADP test, can the QNEC plus the regular PS be considered for the ABT or only the PS contribution?

2) Though the employer wouldn't like it, the cheaper route would be to give the non-covered NHCE's from the other company a QNEC in the amount of the covered NHCE's average deferral percent, which is only 1.87%.

Other considerations? Thanks!!

Edited by M. Martin, 10 March 2007 - 05:30 PM.

#2 Tom Poje

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Posted 12 March 2007 - 06:24 AM

look at
1.401(a)(4)-11(g)(3)(vii) Special rules for section 401(k) plans and section 401(m) plans. (A) minimum coverage requirements.

even has its own title, fully expecting the possibility of failing coverage in a 401(k) plan!
ok, there are actually 2 paragraphs o ne for 'before 1/1/06 and one for 'on or after 1/1/06'

do you have a copy of the regs handy, or is that enough to get you started?

#3 M. Martin

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Posted 13 March 2007 - 11:27 AM

I have access to CCH and was able to locate, thank you. I also found the following info in the ERISA Outline Book, under Section IX, Part C:

A plan can avoid disqualification by adopting a corrective amendment expanding the coverage of NHCs who benefit under the plan (e.g. eliminate an employment classification exclusion) or by increasing the allocations or accruals for NHCs who already benefit under the plan.

1.b. Expanding coverage for a 401(k) plan: employer must make QNEC. When a 401(k) plan fails coverage an employer can't retroactively allow employees to make deferrals. The permitted correction would be for the employer to make a QNEC to the NHCs who are added to the 401(k) by the corrective amendment. The QNEC must equal the same percentage of compensation as the average ADP of the NHCs who were eligible employees for that year.

1.c. Additional contributions made to increase the average benefit ratio would not necessarily have to be QNECs. If the arrangement covers enough employees to satisfy the nondiscrimination classification test but has an average benefit ratio under 70%, the amendment might provide for an additional employer contribution to be made to already eligible employees so that the average ratio will increase to 70% or more.

If 1.c. were to apply it then appears that I first need to determine if enough employees are covered in order to satisfy the nondiscrimination classification test. If passed, then could the employer give a PS contribution to the covered NHCs and satisfy the average benefit test instead of the ratio percentage?

The plan allows for a cross-tested profit sharing allocation with 3 groups: A) Owners direct & family members, B) Upper Management which has 1 HCE and 1 NHCE & All Other eligible participants not in A or B. Allocation Requirements: Active w/1,000 hours, terms excluded.

My employee numbers are as follows (considering only the 401k deferrals made for 2006):

Company A: 7 HCEs & 37 NHCs
Company B: 1 HCE & 33 NHCs not covered by Co. A plan, does not have plan of their own

Ratio percentage = 63.50 (excluding OEEs)

#4 Tom Poje

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Posted 13 March 2007 - 12:16 PM

if your ratio % is > 50% then you have to pass nondiscrim classification since the largest midpoint is 45%. therefore, if you can pass avg ben % test then you 'win' this year's tournament.
therefore you are correct, you could increase the profit sharing to the NHCEs in sufficent amounts to accomplish this task.