Short Plan Year and coverage failure

[John Feldt ERPA CPC QPA]

Two 401(k) plans, two employers in a controlled group. Neither plan is safe harbor.

The Big plan has deferrals and an annual discretionary match option. Calendar year plan. No match intended for 2008.

The Small plan has deferrals and a discretionary match. Plan year was 9/30, until 9/30/2008, when they had a short year ending 12/31/2008. They contributed a discretionary match for the 12/31/2008 year.

Small plan did not have enough NHCEs in the short plan year for the match portion of their plan to pass coverage, the ratio test result is about 45%. They have a NS PT that applies 410(b) failsafe language, but even after exhausting all of the listed steps, the plan does not have enough NHCEs to pass coverage for the match.

Big plan has a discretionary match option. They could decide to provide a match for 2008. Could the two plans be aggregated for coverage purposes for the match? One plan year is short, the other is 12 months, but they both end 12/31/2008.

[Tom Poje]

I don't think so.

1.410(b)-7(d)(5) says you can't aggregate plans unlee they have the same plan year (not 'same plan year end')

[John Feldt ERPA CPC QPA]

What would you suggest?

[Tom Poje]

are you saying you gave all the NHCEs a match?

ugh, if I remember you cant even use the avg ben % test (nondiscrimation classification test) if you have fail safe language.

[John Feldt ERPA CPC QPA]

Yep. The math says the small plan doesn't have enough people to make it pass. Avg. Benefits is out.

We also said ugh. The problem was avoidable 2 years ago when they first became a controlled group, but their bundled provider (asset gathering is first, anything else is a lower priority) did not make the plan years the same until it was too late. The bundled provider is asking us, saying something like 'help us, somebody, please help'.

[John Feldt ERPA CPC QPA]

are you saying you gave all the NHCEs a match?

Actually, let me clarify: we gave a match to all of the NHCEs who had met the age and service requirements and had elected to defer, regardless of whether or not they had 1000 hours or last day (the plan's allocation requirements). There wasn't a named group excluded or anything like that, if that was your question.

[Tom Poje]

I take it that means you don't have enough 'ineligibles' that you can also give a QNEC to in order to pass testing

(of course, under the transition rule there is no reason for griping because the government gave them a window and they simply didn't take advantage of amending until it was too late)

[John Feldt ERPA CPC QPA]

Actually, if the plan gave a QNEC to all NHCEs in the small plan, regardless of eligibility, then they would just squeak by - they require age 21 and a year (keep in mind that some of those ineligible employees were only there for a week or two during that short plan year).

If that would work, I assume the plan would not have to be amended (since that would be a -11(g) type of amendment). So does the last step in the plans 410(b) failsafe language cover this:

"If, after application of the correction procedure above, the coverage requirements are still not satisfied, the Employer may apply the same procedure to an otherwise excludable class of Employees until the ratio percentage test is passed."

Assume the plan allows a QNEC.

Certainly the window was the right time to make the change, but it doesn't appear that they received any advice from their service provider. We can only hope that this becomes an opportunity for a change to be made regarding their service provider...

[Laura Harrington]

When I first read this question a few days ago I was wondering how your 401(k) coverage test was passing but not your 401(m) coverage test if you had applied the fail-safe provisions.

The fail-safe wording I have seen in multiple protoype and volume submitter documents does not limit only adding in those who are deferring when the 401(m) coverage test fails.

The fail-safe wording generally says the accrual requirements do not apply (or apply on a limited basis) if the ratio percentage test is not passed, hence the reason some documents refer to these provisions as the suspension of accural requirements. Since you are suspending the accrual requirements you can count anyone who would have received a match if they had deferred. So if your 401(k) ratio test is passing, your 401(m) test should be passing after the fail-safe provision as well because it should be the same numbers (unless eligibility is different).

If your document has wording that limits only adding in those who deferred, it would be the first time I have seen such a provision.

Also, a prior post indicated that if you have fail-safe wording you cannot use the average benefits test. This is not entirely true. It usually just means you cannot use the average benefits test until you have applied the fail-safe provisions (i.e. determined benefits by suspending accrual requirements). If the coverage test is still failing you can still try to satisfy coverage using the average benefit test.

[John Feldt ERPA CPC QPA]

After trying to add benefits for all of the eligible employees by removing the last day and 1000 hour requirements, the last step starts removing the plan's eligibility requirements. However, aren't the lowest requirements are required for determining the total EE counts in the test?

If so, that starts bringing in more NHCEs into the denominator (from the big plan) and they are not helping. I no longer squeak by. In fact the sqeaking does not occur. I should have noticed this before the earlier posts. Back to square one. I agree Laura, that the ABT then becomes an option.

If the ABT fails, then no solution is available?

[Laura Harrington]

After trying to add benefits for all of the eligible employees by removing the last day and 1000 hour requirements, the last step starts removing the plan's eligibility requirements. However, aren't the lowest requirements are required for determining the total EE counts in the test?

If so, that starts bringing in more NHCEs into the denominator (from the big plan) and they are not helping. I no longer squeak by. In fact the sqeaking does not occur. I should have noticed this before the earlier posts. Back to square one. I agree Laura, that the ABT then becomes an option.

If the ABT fails, then no solution is available?

Yeah, the lowest requirement would have to be used for determining total EE counts in the test unless you apply the otherwise excludable rule, which probably isn't going to help, otherwise your original test would have passed.

If the ABT fails you have the option to do an 11(g) amendment. It doesn't sound like you are going to be able to come up with a cheap solution to this problem!