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401(k) Failed coverage test


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401(k) plan excludes a group of employees. Historically this has not been an issued. For 2017 when running the coverage test for the excludable employees, coverage fails. This will require the employer to bring in a substantial number of excludable employees to pass coverage. These employees will all receive a QNEC.

the issue is which employees are brought in to pass coverage. Can the plan use date of hire as the basis for determining how to bring in?  We looked at hours ( those with the hours closest to 1,000) and this results in an OUTRAGEOUS QNEC.  Using date of hire or compensation would result in a lower cost.  

Can not find anywhere in the reg the process that must be followed in determining who gets brought in to pass coverage.   

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does the document address the issue?

for instance the FT William checklist references 4.02

4. Coverage Failures for Matching Contributions

Method to fix Matching Contribution Code section 410(b)(1)(B) ratio percentage coverage failures (Section 4.02(d)):

a. [ X ] Do not automatically fix

b. [ ] Add just enough Participants to meet the coverage requirements

c. [ ] Add all non-excludable Participants

and 4.02(d) in the basic document is pretty specific who to bring into the plan:

(A) The list of Participants eligible to share in the Company's Matching Contributions for such Plan

 

Year shall be expanded to include the minimum number of Participants who would not otherwise be eligible as are necessary to satisfy the minimum coverage requirements under Code section 410(b)(1)(B). The specific Participants who shall become eligible to share in the Company's Matching Contribution for such Plan Year pursuant to this Paragraph (A) shall be those Participants who remain in the Company's employ on the last day of such Plan Year and who have completed the greatest amount of service during the Plan Year.

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The document does not address how to correct the test!.  Seems  your plan uses  hours of service. I am hoping the plan can use a different methodology, i.e. date of hire, compensation etc.

 

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the regs (1.401(a)(4)-11(g)(3)(vi)(C) simply says

(1) expands the group....

there is no specific conditions listed. (except for 'must have substance')

which is generally taken to mean you couldn't give, for example $1000 to a 0% vested terminee.

or you wouldn't give $1 QNEC to someone and turn around and claim "see, he benefits"

the following IRS comments, while dealing with nondiscrim and not coverage, possibly give some insight as to why a plan like FT would increase using those with the most service (though the document was written before the IRS comments, and it is the type of fail safe language the IRS has already approved as opposed to 'increase starting with the ee who has the smallest comp). (which I suppose is interesting because if it was a QNEC for an eligible  ee to pass ADP testing you generally have language to start with the smallest paid. but I guess that is the difference between giving something to someone who is already eligible instead of bringing someone into the plan.

e.g. failing coverage is a serious problem. to pass coverage by simply providing a corrective contribution to those with the smallest cop, etc is probably not the 'intent' of how the corrective amendment is suppose to work. but I'm certainly not one in a position to decide that or pass judgment in any particular case. (and I'm probably in the minority on how I view it...)

you didn't indicate why after years of passing all of a sudden it fails bad enough so that a significant number of NHCEs (not just one or two) must be included. my concern there is that it sounds like this will be a continual problem.

 

irs comments on nondiscrimination.docx

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Check again.  Does your document have "Fail safe" language?  If so, then you must correct according to the steps there.  Otherwise, I think you can pick and choose until you pass.

Have you tried the Average Benefits Test for coverage?  Sometimes that works.

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The 410(b) fail-safe language in our VS document only brings in people who fail to benefit due to a last day and/or hours requirement.  That won't add anyone back in for the 401(k) portion of the plan.  Unless the document is really poorly written, it should allow for other testing options, including average benefits testing, if the plan still fails ratio percentage after application of the fail-safe. 

I'm assuming the QNEC mentioned by the OP is for correcting people who would be retroactively added to the plan for deferrals as part of correcting the 410(b) failure.  If the QNEC you are looking at to be able to test the excludables separately is outrageous, how bad are the testing results if you test everyone together?

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