Dual Eligibility & a Safe-Harbor Plan

[Fred Payne]

Dual eligibility provisions allow an HCE (and others) to enter the plan by virtue of having been employed by the Effective Date. Employees hired after the Effective Date must meet 1 Year, 1,000 Hours service requirements. The HCE does not meet the more restrictive eligibility requirements until the 2nd year of the Plan.

In the first Plan Year, all employees regardless of hire date are considered part of the coverage group because of the no-service requirement of the early-entry, Dual Eligibility provision (the least restrictive requirement.) Given the particulars of who was in the plan as of the Effective Date vs. those hired later, the Plan fails coverage. So what is the impact of failed coverage if the Plan is a Safe Harbor 401(k)?

If a 3% SHNEC was elected, do all employees receive the 3%? Or just enough to past coverage?

What if the Safe Harbor was a Basic Match? Who is entitled to a Match and how would it be calculated since all those hired after the Effective Date were not offered the chance to defer?

I am sure to have follow-up questions based on your answers.

Thank you.

[Blinky the 3-eyed Fish]

Why aren't those hired after the effective date excludable because they don't meet the plan's eligibility requirements? I have a feeling the coverage testing is being done incorrectly.

[Fred Payne]

When a plan has more than one set of eligibility requirements, the exclusuion for employees who fail to satisfy the plan's age/service requirements applies to the LOWEST age/service requirements applicable to ANY employee benefiting under the plan for the plan year.

Assume the Plan Sponsor started business October 1, 2004, and hired 10 employees that day (one of whom is an HCE). The plan sets up dual eligibity provisions that says anyone hired as of October 1, 2004, is in the plan. Anyone hired thereafter must perform a Year of Service of 1,000 hours and enters in the plan the following Jan 1 or July 1. Eight people were hired in December, 2004. These eight are in the coverage group because they meet the least stringent eligibility requirement of the dual eligibility, i.e., no service.

Disaggregating plan for coverage purposes is not possible because no one has earned a year of service. Coverage fails.

[Tom Poje]

you are correct. given those conditions, the plan could fail coverage (unless the NHCEs receive a greater % of pay than the HCE and the plan passes the average benefits percentage. (Given the facts you provided it would pass rate group testing)

the facts seem rather unique, to start a plan and include ees immediately, but guess anything is possible

[Fred Payne]

Notwithstanding the unique situation, I have three newly established plans this quarter with dual eligibility. Whereas these business have not yet hired any new employees since the Plan's Effective Date, they have told me they will. Given current census and projected hires, all three of these businesses will most likely fail coverage. (I'll have to look at the Rate Group Testing possibility. THanks for that tip, Tom.)

So I'm back to my original question. If I fail coverage in a 401(k) Safe Harbor--be it 3% SHNEC or Basic Match--how do I remedy the failure?

[Blinky the 3-eyed Fish]

Fred, good info on 410(b). Not to often would it come up but good to keep in mind.

I haven't read Rev. Proc. 2003-44 in a bit, but I do recall a preferred correction method for a 401(k) coverage failure was to provide the average of the NHCE deferral rate to the participant added back to pass coverage because they didn't get a chance to defer. The corresponding match would then apply. I will let Tom handle any safe-harbor related questions.

Also, why is rate group testing being brought up? I didn't see that we were getting into nondiscrimination testing.

[Tom Poje]

1.401(a)(4) -11(g)(2) for purposes of satisfying minimum coverage...................

a corrective amendment.....grant allocations to those who did not benefit...

thus, change date of eligibility with a corrective amendment. although if you are referring to a 2003 calendar year plan I guess you would be past the 9 1/2 month rule.

[Fred Payne]

Tom:

You say "grant allocations to those who did not benefit."

Do I give an allocation to everyone in the coverage group, or to only that number of employees I need to have to pass coverage?

If the plan is Basic Match vs. 3% SHNEC, do I give everyone who did not benefit a the Basic Match as if they had deferred sufficient amount to earn the max Basic Match?

And what about Blinky's comments: giving a QNEC equal to average deferral rate?

--Fred

[rcline46]

I don't see the problem. Almost all 401(k) plans are set up with an open enrollment/immediate eligibilty on the effective date of the plan.

If you are not employed on that date, then you fall under the 'normal' eligibility rules. Those hired after the open enrollment are not eligible for the plan, no how, no way, and are not in any testing.

How can someone get into the 410(b) testing if they have not satisfied eligibility?

Even in Fred's case shoud you use th -0- hour rule (and note I don't think it is applicable) and not the -1,000- hour rule, the next entry date is JAN 1 04 and they STILL are not in the 12/31/03 testing. They just are not participants.

So what did I miss? And by the way, I don't know of anyone who considers this dual eligiblity because it is a 1 time thing and does not persist through later plan years.

[Fred Payne]

I'll give Tom Poje a plug. In his book, Coverage and Nondiscrimination Answer Book, Q 6:14, he states that in the instance of dual eligibility I described, the "second set [of eligibility conditions] must, however, be tested as a benefit, right, or feature for current availability and effective availablility." He concludes that dual eligibility "will proably result in a group or employers entering the plan who would not have been eligible under a more restrictive eligibility requireemnt."

I looked in the ERISA Ootline Book and Corbel's PPD Research library. All three of these sources agree that there can be coverage failure. I'm confident that is not in dispute.

I'm more concerned about how to correct the failure. Is there something special to consider when it's a Safe Harbor Plan, or do I treat it as Blinky suggests? Since some HCEs are deferring very high percentages of comp under a Safe Harbor, Blinky's correction will be VERY expensive.

[Blinky the 3-eyed Fish]

NHCE rate, not HCE rate.

[rcline46]

Let me try again. If you have different eligibility for different groups of people - clerical staff and professional staff - then the BRF applies.

This case just does not fit the bill. It is like a window early retirement. It is not dual eligibility. I don't have Tom's book, so in Sal's book tell where this fits the definition of dual eligibility.

Since the one time, effective date eligibility condition ENDS the day after the effective date, then there is only ONE, not TWO eligbility conditions for those hired after the effective date.

Tom, Fred - got time to quote me just where you think this qualifies as dual eligibility??

[Tom Poje]

See ERISA Outline Book 8.96 (2003 edition)

Dual Eligibility:

"1. New Businesses. A dual eligibility provision is most common in a plan established for a new business. The plan may provide for immediate entry of employees hired by a certain date (since no employee has completed a year of service), but a one year of service requirement for employees hired after that date. See Chapter 2 (Section II, Part G) for a discussion of other uses of dual eligibility."

There is a very good reason for this rule. Prevents an owner from setting up a business, having immediate elig. for himself and then, by magic, since everyone else hired after that date, doesn't get in nor included in the test. dang, the owner could conceivable get 2 years of contribution without this rule.

in the same vein 8.118 expand coverage for 401(k) plan, er must make QNEC

(Sorry, I don't think I even have a note like that in the Answer Book. have to get that added for next time)

my understanding of the corrective amendment would be that it only needs to be enough people to pass coverage, thus you can be discriminatory amongst the NHCEs. If you have default language in the document, then you would have to follow that to determine who to bring into the plan.

[Fred Payne]

Thanks, Tom. And thanks, Blinky.

ERISA Outlines further states that the possible expansion of the coverage group arising from dual eligibility "will occur until all the employees subject to the more liberal eligibility rules have satisfied the more restrictive rules applicable to other employees."

Corbel's PPD ERISA Research Guide gives a lengthy example in which this sort of coverage failure is illustrated. However since the example has for early entry under the dual eligibility provisions a hire date up through the last day of the first Plan Year, and since the only HCEs are hired in the first half of the first plan year, the coverage failure in the second plan year (because additional HCEs were hired in that year) can be remedied by disaggragating the plan and testing separately. (The HCEs fulfilled the year of service requirement and entered the Plan July 1 of the 2nd plan year.) If Corbel's example had had the HCEs being hired in the 2nd half of the first plan year, one could not have pursued disaggregation since no HCE would have met the more stringent eligibility conditions by the end of the second Plan Year. They unfortunately don't give an example of how to remedy coverage failure in that instance, thus prompting my questions.

[rcline46]

Guess I am going to be stubborn ..... With all due respects to Mr. Poje and Mr. Tripodi....

Reg 1.410(b)-6(b)(2) does not anywhere use the words "for the plan year".

Not one of the examples (as I admittedly skimmed through them) discusses successive eligibility requirements in time, only different plans.

If the fear of this technique is based on what is in the reg above, I don't see it.

If the fear is due to an IRS functionary opining at some conference, I won't be swayed, but I can understand others may be concerned.

So Tom pointed out what he feels compelling. I don't see it there.

I will let Fred, and any other readers, make up their own minds. Until something more compelling comes along, I must humbly disagree.

[Blinky the 3-eyed Fish]

As someone who was already swayed I offer that the reg doesn't need to say "plan year" as that is a function of the period being tested. The reg says, ".. those employees who fail to satisfy all of the different sets of age and service conditions are excludable employees with respect to the plan.". If you are testing a plan year, you are applying the eligibility requirements in effect for that plan year. For situations where there is immediate entry for some and not for all, there are 2 sets of eligibility requirements. I am not sure how you would justify not applying the rule.

[rcline46]

I have not found any references to successive eligibility since 1994 410(b) regs, and all examples are to concurrent eligibility.

I am not willing to stretch concurrent rules to successive situations.

Since I admit I am not a perfect searcher in all of the material, then there might be something on successive eligibilities that I have missed.

Note - neither does this rise to a pattern of amendments creating discrimination cuz 1 is not a pattern.

[Kimberly S]

Have new regulations or situations changed any of your opinions on this topic in the past few years?