Fail Safe Language

[Lynn Campbell]

It sounds like, based on other posts, that fail safe language can be limiting. In the document I am using, if I choose fail safe, then the Plan must pass 410(b) by the ratio percentage test. If I do not choose fail safe, then the Plan does not seem to contain any language about how to fix a failed 410b or 401(a)(4) test. Would I just use the corrective amendment route? Is it OK that the Plan does not specify that I should use the corrective amendment option? This is all theoretical, I am doing the GUST amendment and trying to pick out the best language.

[Tom Poje]

A corrective amendment is just that, the plan doesn't specify that option.

Here is at least one problem with the fail safe language

(This comes directly from a document)

In the past it read

'if the plan otherwise fails to meet the requirements of Code Section 410(b)(1)...'

the new language now reads 'if the plan otherwise fails to meet the requirements of Code Section 410(b)(1)(B)...'

a slight change, but significant.

This is saying if you fail ratio %, you have to correct by bringing more people in, even if you would have passed 410(b) using the average benefits test

[AndyH]

Lynn, is this an approved GUST document? I've run across many that you describe, but they were attempts at prototypes before the IRS disallowed xtested prototypes.

The IRS made us remove all failsafe language from our xtested docs. And I thought others had to do the same. What is the status of the one you are referencing? Could this be pre-GUST and therefore a moot point?

[Mike Preston]

In our GUST volume submitter plans we have the ability to add fail-safe language to plans that have cross-testing language. I don't favor fail-safe language, but I know that many people implement it.

[Lynn Campbell]

This is a Volume Submitter Plan...thanks for all the help.

[AndyH]

Interesting. All our Pre-Gust volume submitter xtested plans had failsafe language in them, but the IRS required that it be removed.

[Lynn Campbell]

When might it be advisable to include fail safe language?

[KJohnson]

Mike,

The reviewing agent and I had a long discussion about this regarding my volume submitters. They orginially insisted that this option be taken out. Ultimately he let me keep this in. His problem was a defintely determinable issue and I convinced him that as long as the method for the "add back" was spelled out and there was no employer discretion with the add back, you should not have a DD problem

[Mike Preston]

Lynn, I think it depends on attitude. Some people like it, some people don't. I prefer not to have the fail-safe language because it specifies a singular correction methodology when, if not specified in the plan, a plan sponsor might have multiple options for correction.

There are some that argue that the cost of compliance is reduced with fail-sae language. I agree as to the impact on time necessary to fashion a correction. That is a given. If the correction is mandated it takes almost no time at all to fashion a correction: just follow the document as it exists. But I have found that the time involved in fashioning a correction is frequently less than the cost of a fail-safe correction. That isn't always the case, though, so it remains a judgement issue at that level.

There are also people who like the fail safe language because it allows untended plans to claim a violation only of operational compliance (we failed to follow the terms of our document, so we will just do what we should have done under EPCRS and be fine), rather than a violation of the non-discrimination rules that requires a retroactive amendment under EPCRS.

I certainly agree that if a plan is not going to be tended, it will likely be in a better document position to have the fail safe language once a problem is discovered. Howver, this isn't always the determining factor. Even then, a non-fail safe plan might be able to fashion a correction that is less costly.

fwiw

[Guest DMK]

How do you correct a 410(b) failure under EPRSC by retroactive amendment? Would you have to submit the amendment to the IRS for approval? There doesn't seem to be a whole lot about correcting demographic failures in the Rev. Proc. Thanks.

[Blinky the 3-eyed Fish]

1.401(a)(4)-11(g) provides the mechanism for correction. No need to submit to the IRS.

[AndyH]

.......provided the correction takes place within 9 1/2 months of the plan year end, but that is not a EPCRS action.

I thought he/she was asking about a period beyond that since there was a reference to a Revenue Procedure.

[Tom Poje]

make sure corrections are done within 9 1/2 months. amendment under -11g must have substance.e.g. a terminated ee who is 0 vested and given a contribution would not fly.

After 9 1/2 months, since it is 410(b) it is a demographic failure. SCP not available. Walk in Cap, VCP could be used.