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Coverage Testing Correction


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We failed coverage testing for our match.  We decided to correct by giving QNECs to non-highly compensated employees ("non-HCEs"). 

Do we need to give QNECs to all the non-HCEs? 

Can we pick one group to contribute to and leave out another group?

What about people who are no longer employees -- do we have to include them?  Can we include some but not all of them?

We have a group of people that are arguably benefits-ineligible that we'd like to exclude, but there is also an argument that they are eligible, so if we are required to include all the non-HCEs, we may have to give them QNECs as well.

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On ‎8‎/‎30‎/‎2018 at 4:28 PM, calexbraska said:

We have a group of people that are arguably benefits-ineligible that we'd like to exclude, but there is also an argument that they are eligible, so if we are required to include all the non-HCEs, we may have to give them QNECs as well.

I think you need to address this before you look at 410(b).  Are you referring to eligibility for the plan? Or, whether they have satisfied the allocation conditions to receive the match?   The plan provisions are required to be written so that the requirements for both are based on objective criteria that are clearly set forth in the document and not subject to employer discretion.  See 1.411(d)-4 Q&A 6.  What plan provision isn't clear about how it applies to these people?  And, what about their situation makes it unclear?

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ignoring for the moment your issue of 'maybe these folks are not inelligible' (or rather once you have decided how to handle the folks in question)

then your document might provide some guidelines.

an example from the FT William document (some documents have language that 'self-corrects' in case of failure (known as fail safe language) so you don't have to put in a corrective amendment. for example item b could have been check, in which case you bring in just enough people to pass. item would bring in everyone.

if this was your plan language, since item 'a' was checked you would bring in people by a corrective amendment, and generally that would be just enough. but such amendments must have substance.

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

along with the following language to specify who gets brought in

(2) If the Adoption Agreement specifies that just enough Participants shall be entitled to share in such

contributions for such year, then the following additional Participants shall be eligible to share in such contributions:

(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.

(B) If, after the application of Paragraph (A) above, the minimum coverage requirements of Code section 410(b)(1)(B) are still not satisfied, then the list of Participants eligible to share in the Company's Matching Contribution for such Plan Year shall be further expanded to include the minimum number of Participants who do not remain in the Company's employ on the last day of the Plan Year as are necessary to satisfy such requirements. The specific Participants who shall become eligible to share in the Company's contribution for such Plan Year pursuant to this Paragraph (B) shall be those Participants who had completed the greatest amount of service during the Plan Year before terminating their employment with the Employer.

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If you are doing the amendment after the end of the year, you need to comply with 1.401(a)(4)-11(g), which means (among other things) that you can't pick only participants who are nonvested (see the regulation).  (...But that doesn't apply to THIS situation since you are going to give QNECs or QMACs.)  If by ineligible you mean an excluded classification, then some plans' 410(b) fail-safe language does not extend to the correction of excluded classes (or non-adopting employers) causing the 410(b) failure.  The fail-safe provision, if there is one, might not apply to the matching component.

The IRS is on record as saying you better not go after those with the shortest service and other groups that yield the lowest-dollar solution (the so-called "Gold Standard" named after an infamous internal IRS memorandum sent from Carol Gold), and that bit of information is just a "FWIW" (I.e., it's subjective and informal guidance, and though it's worth mentioning it, most employers are not looking to "abuse" their discretion).   (I know some practitioners take the Gold Standard with a grain of salt.)

So, assuming that the plan doesn't preclude what you want to do, and assuming that the employer is picking a reasonable cross-section of employees (thus avoiding the Gold Standard if you care about it), then you need to think about reliance.  If you have a preapproved plan but there is no preapproved option for what you want to do (such as a blank line for writing in what you want to do), you probably will lose reliance on an amendment that departs from preapproved language.  For example, if your only preapproved option is to make a corrective contribution for all NHCEs, and you want to keep reliance, then that's what I would recommend that you do.  Even so, you might be able to reasonably interpret such an option of "all NHCEs" as not having any effect on employees who are in an excluded classification, i.e., they would most likely not be within the meaning of "all NHCEs".  You may need to examine the wording closely.   Some documents define an "Eligible Employee" as anyone who is not excluded via a class exclusion or because the employer hasn't adopted the plan, etc., so you most likely don't need to extend coverage to those "non-eligible" employees unless you absolutely need to do so in order to pass the 410(b) test, and in that case, your amendment needs to specify exactly who is in and who is not, i.e., who is in an excluded class and who is no longer in an excluded class.

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