Solving 410(b) with short service employees

[cathyw 2]

A safe harbor 401(k) plan has a 30-day wait (with entry first of the month coinciding with or next following) for full-time employees, and one year of service for part-time employees.  For 2019 the plan fails 410(b) ratio test even with disaggregation of statutory excludables.  The employer does not want to bring any part-time employees into the plan who would not otherwise satisfy the one-year eligibility.  They could bring in those full-time employees hired after November 1, 2019 through an 11(g) amendment and make a QNEC to cover the auto enroll deferral percentage of 4% plus the safe harbor match of 4%.

I'm concerned about using these short service employees to satisfy 410(b) because the 8% QNEC will be such a small amount.  I know the IRS issued guidance many years ago restricting the use of short service employees to satisfy 401(a)(4).  Would the same prohibition apply for 410(b) purposes?

BTW, we're also checking out average benefits testing for coverage, but it looks like it will be very expensive.  

Thanks for your input.

[Mr Bagwell 51]

What part of 410b fails?  401k, 401m, 401a?

[cathyw 2]

Minimum coverage for 401(k) and 401(m) failed.  Minimum coverage for 401(a) passed.

[CuseFan 233]

How does that happen?

If ELIGIBLE for 401(k) deferral = benefiting whether defer or not.

If ELIGIBLE for Match had they made a 401(k) deferral = benefiting whether deferred and got match or not.

How are possibly failing coverage on K & M if people are eligible after 30 days (FT) or 1 YOS (PT)?

[cathyw 2]

When there's dual eligibility, you run the test with the smallest waiting period...in this case 30 days.  Therefore, all the part-time employees who didn't have one year are non-excludable, not benefitting.  And that resulted in a ratio percentage of 67.5%.  We tried disaggregation of statutory excludables, but that didn't work because there were a few HCEs who had less than one year and who had benefitted.  That ratio percentage was worse, about 40%.

[C. B. Zeller 430]

How are they HCE with less than a year of service? Are they the owners' kids?

At the risk of stating the obvious ... letting the owners' kids in after 30 days but making regular employees wait a full year is exactly the kind of behavior the coverage rules are intended to prevent.

Have you checked the plan document to see if it says what happens when coverage fails? Some documents will provide that non-excludable NHCEs are brought in automatically.

[cathyw 2]

The HCEs are not owner's kids.  This is a large multi-national company with over 5,000 US employees.  The HCEs had in excess of $120,000 in 2018 but terminated employment before they had 12 months of service.  For example, hired May 2018 and terminated March 2019.

[C. B. Zeller 430]

On 10/10/2020 at 8:30 AM, cathyw said:

The HCEs are not owner's kids.  This is a large multi-national company with over 5,000 US employees.  The HCEs had in excess of $120,000 in 2018 but terminated employment before they had 12 months of service.  For example, hired May 2018 and terminated March 2019.

My small-plan bias is showing, apologies for jumping to an unfounded conclusion.

If you posted numbers (how many HCE/NHCE are FT/PT and <30 days,30 days-1 year, and >1 year) it might help.

Back to the original question, the directive on plans benefiting short service employees that I think you are referring to is the so-called Carol Gold memo. My understanding of the memo is that it is intended to address plans which are abusive by design, not corrective measures.

One thing to watch out for, if you are retroactively correcting a coverage failure, is 1.401(a)(4)-11(g)(3)(vi)(A) which disallows the correction if it is part of a pattern of amendments being used to correct repeated failures. A one-time or occasional correction should not be an issue.