Coverage Testing

[Guest Mike Schwing]

I have a small NCP plan - 2 owners in classs 1 and all other eligibe employees in group 2. The plan requires an employee to be employed on the last day of the plan year to share in a contribuiton. The volume sumbitter does NOT contain fail safe provisions for passing ratio percentage test.

The profit sharing is a discretionary amount in which participants in each group share at an equal percentage of compensation based on the total dollar amount to be allocated withing each group. The employer has decided on the contribution amount to be allocated however, I am having serious problem passing coverage testing.

There are 5 NHCE's of which 4 were termianted prior to the last day of the plan year. The plan does not pass 410(B) ratio percentage test and I can't get it close to passing ABT because of the four termianted ee's - all of whom worked over 500 hours during the plan year.

Do you think I can do a retoractive amendment to the plan to add back some or all of the NHCE's to pass ABT?

[AndyH]

Yes, if the document does not specify another method of correction. And you have up to 9 1/2 months after the end of the plan year.

1.401(a)(4)(11)-(g)

[Guest Mike Schwing]

Okay, but how do I go about

1. choosing which NHCE's share - or must I make all of them eligible? Can I amend it using a scale - i.e. add back based on most recent term date - or most hours worked during the year until I have enough ee's to pass coverage - kind of like failsafe language.

2. Do I have to add back based on passing a ratio test or can I add back based on passing ABPT?

Becuase it is an NCP plan I worried about 411(d)(6). I have not allocated any amounts to the 2 groups yet. The employer wants to max group 1 and min group 2. Right now, before amending I can't do any allocation that passes 401(a)(4) let alone coverage.

Obviously, I'd like to be able to add back just the youngest terminated NHCE and then determine my allocations among the groups but I fear if I do this I may violate 411(d)(6) because doing it this way I can increase the contribution to the HCE's while decreasing the contribution to the NHCE's in group 2. Am I not thinking straight?

I know I have to be careful about adding back 0% vested ee's only - I think I would have to somehow vest them also if this is the case - which is an entirely different subject.

[AndyH]

I think you can do just about any of the above, although you are right about the vesting part.

yes, you need to be careful about 411(d)(6). Our 11-(g) amendments, and failsafe provisions (which we've had to remove) specified that there were two contributions, the normal, and the corrective one. That way it at least appeared that this was something being added, not something being re-distributed.

And our (now deceased) standard failsafe provision was comprised of an individual allocation to the youngest NHCE in the failing rate group to the extent necessary to elevate him to above the HCE in that group, then if that still fails, go to the next youngest, etc. until the test passes (whether by ratio or average benefits).

And, p.s. all of your comments and concerns are valid, but there is great flexibility available with such corrective amendment.

[Mike Preston]

What plan year is in question? Are you projecting for the 12/31/2002 year? If so, keep in mind that -11g amendments are, by definition, retroactive. If you make an amendment before the end of the year, do you need to be concerned with the vesting issue?

[Guest Mike Schwing]

It's an 11-30-02 year end. I found out the plan does have failsafe provisions so we are adding a three employees back - we have too based on the document's add back language. Two of them are non-vested so we are going to vest them the minimum amount.

One question came up about adding back a 0% vested employee who HAD a non-vested balance in the plan. Do you only make the current year contibution partially vested or do you make the current year contribution AND their existing balance partially vested. I think only the contribution, becuase we are only adding them back to pass coverage & only this contribution should have "substance" not the prior non-vested balance.

[AndyH]

What does the document say? If it does not say they must be vested, then they should not be vested. I understand that the vesting issue only comes about regarding corrective plan amendments, which according to1.(401)(a)(4)-(11)(g)(4) "must have substance". This is where the vesting requirement applies. You cannot arbitrarily vest someone unless the plan says so.