John Feldt ERPA CPC QPA

If I had a nickel for every takeover where the coverage testing had only considered the employees eligible for the plan instead of all the employees of the Employer under 414(m) etc., I’d have a bag full of nickels.

Plan A coverage = (9/20 NHCEs) / (2/2 HCEs) = 45% Plan B has no HCEs covered, so plan B coverage is an automatic pass, and we assume it has the same safe harbor as plan A to allow aggregation with plan A if necessary to get plan A to pass coverage. Plan A’s 45% result is greater than the safe harbor percentage for coverage, which is 27.50% based on the concentration percentage, but it’s less than 70%. So without aggregation of plans, the average benefit test for coverage is necessary. Does plan A satisfy the nondiscriminatory classification test of 1.410(b)-4? Meaning, does it cover a reasonable business classification? If not, and you aggregate the two plans to get plan A to pass coverage, you must now also aggregate the two plans for purposes of nondiscrimination testing, and if allocations are tested on a benefits basis (cross-tested), then the gateway minimum allocation does apply. Shut you want plan A to pass coverage without aggregation with B so you can avoid the gateway in B. If you do have a reasonable business classification defining who is covered by plan A, then you run the average benefit test. You can run that on a benefits basis or on a contributions-basis. You need that to be 70%, and if it is, then Plan A passes coverage without aggregation with plan B, and no gateway applies to Plan B even if Plan A is cross-tested.

Seems okay to me.

Does this possibly create multiple rates of match that could require BRF testing?

Yes. Assuming the plan covers a reasonable classification under 1.410(b)-4(b) and also meets the safe harbor percentage under 1.410(b)-4(c)(2), the average benefits test prong of the coverage test can be done on a contributions-tested basis or on a benefits-tested basis. The gateway minimum only applies if, after passing coverage, you run the nondiscrimination test on a cross-tested basis (or a component is cross-tested). Meaning, the method used to pass coverage does not trigger a gateway minimum.

Isn’t this addressed in Rev Proc 2021-30?

The plan document would state that it’s discretionary. It can also state the upper limit of the match and any limit for deferrals that will be considered for the match, but more importantly, the document will state if the match is intended to be tested for ACP or exempt from ACP. If tested for ACP, the plan then must identify current or prior year testing. If the plan indicates it will be tested, you must follow the terms of the plan. If the plan indicates it intends to be exempt from ACP testing, for a discretionary match, the employer can use that discretion to decide the percent of the deferral for the match formula, the match limit, and the largest percent of pay deferral that will get matched, but that does not all have to be in the plan document. But keep in mind that the safe harbor notice must also describe this match to allow it to be exempt from ACP testing. So if the plan provides a 3% safe harbor nonelective, and they don't give any safe harbor notice before the beginning of the plan year (it’s not required for a safe harbor nonelective), then the match will not be an ACP-free discretionary match. There is an exception to that. If the 3% safe harbor is a QACA, and they don’t provide the safe harbor notice (it’s not required), they can still provide the ACP-free discretionary match if the plan provisions have it available. Strange, but true. I’ve never come across that in practice however. If the safe harbor notice is generated from your plan document system, then I personally prefer to enter as much info in the plan document to help with the match description in the safe harbor notice, but not so much that it would require an amendment, destroying the discretion that we want the employer to retain.

And keep in mind that nonkey employees who fall into the “otherwise excludable employee” group in 2024 (OEEs) are not required to receive the top-heavy minimum for 2024, assuming that’s what the plan sponsor will be adopting in their good-faith interim amendment. This is new starting in 2024. Lou is correct that you can’t add a safe harbor match mid-year to a plan that already allows deferrals. Is that what actually happened with your plan?

Yes. The discretionary match is limited to 4% of pay, the formula for the match must ignore deferrals over 6% of pay, the rate of match cannot increase as deferrals increase, cannot have any allocation conditions, must be described in the safe harbor notice, the plan must have provisions for the match, it must not allow any HCE to receive a higher match than any NHCE at the same rate of deferral, to name a few requirements. it can be subject to a normal vesting schedule, such as 6-year graded.

You asked: what if we reallocated the excess up to every participant's 415 Limits and there was still $200,000 leftover in excess assets? Would you say the remaining excess could then be transferred to a QRP? Once all participants are at the 415 limit and paid out, to fully terminate the plan, the excess must revert, and I would argue a portion of that reversion can be a transfer to a QRP. Now whether the IRS agrees, that’s a separate question. Counsel is advised.

Suppose all the plans have the same provisions and same investment options. You are fine to aggregate them for testing. The solo plans are a non-public EZ filer, which may be the goal here. If so, go for it. Charge appropriately, of course.

Defers enough to get at least 3% match? Seems okay to me. Follow the terms of the plan documents of course.

Technically the funds are company assets anyway, so either way should be okay.

Another we possibility might be to disclaim the check. We’ve already spent $95 worth of time discussing it!

If I were an actuary, I would be tempted to respond to the question with, “Some of us are beyond help, but thanks for asking.”

Agree. It’s not uncommon to see these firms make these mistakes, it happens a lot.

ASG, of course. But maybe they should get a legal opinion just to make sure. Maybe they know a law firm that employs an ERISA counsel. Happens a lot, surprisingly, although anecdotally I see it more with medical professions.

Who wants to herd a hundred cats, I mean, sole proprietorships?

(a) AND (b) both. You say (a) is not met. So that plan, plan X, is not required to provide top-heavy in that plan, unless Plan X is used to help any other plans pass coverage or nondiscrimination. Thus, if plan X covers only a nonkey HCE, you are golden. Plan X is not used to help the other plans pass coverage or nondiscrimination.

The timing of the contribution is subject to the Benefits, Rights, and Features requirements described under 1.401(a)(4). Easy to determine if it passes “current availability”. When audited, you’ll find out if it passes “effective availability”.

By definition, it’s not an excess if it’s simply more than the minimum they were required to provide. What limit did it exceed?

Then why is “gateway” mentioned in the original post?

Of course, if compliance with SECURE 2.0 is the only thing upon audit that the IRS can find wrong with a plan, then they’re not looking hard enough.

Check bounced? Insufficient funds? Or was it deposited, but perhaps with no allocation instructions, and after getting no response for how to allocate/invest, they sent a check for the trustee to transfer to another trust account for the plan to be held somewhere outside of the R/K platform? Some other reason? The reason it was returned may help for guiding them.

"As a result the 410(b) average benefits percentage test has failed." So we assume the ratio percent test is under 70%. Bri is correct that the plan document might restrict what you can do to make the plan pass testing, so follow that first. Otherwise, if the document gives you flexibility, you can pick the least expensive NHCE or two as needed to make it pass. But read the Carol Gold memo first about giving nominal benefits to short service low paid NHCEs, and its reference to 1.401(a)(4)-1(c)(2). And what Zeller said.