Coverage Testing on Match Contributions

[Guest Toni Jo]

We have a take-over plan that requires the participant to be active on the last day of the plan year to receive a match. We also have a lot of employees not participating. When we do the coverage testing for the plan year, do we count the non-participating terminated employees as benefitting or do we need to count them as non-benefitting because of the last day requirement? Thanks for your help, we have disagreeing opinions in our office and just wanted to verify with someone else.

[goldtpa]

An employee is not taken into account for purposes of coverage testing if the employee does not benefit under the plan for that plan year.

An employee is treated as benefitting if the employee receives a contribution, an allocation of a forfeiture, or is eligible to participate in a 401(k) however elects not make elective deferrals.

[Brian Gallagher]

But when you do coverage testing you need to test each money type seperately. i would say if the person is not eligible to receive a match due to the last day rule, he is not benefitting under the plan with respect to match.

(at least that's what I've been assuming all these years.)

[austin3515]

If a terminated employee would have received a matching contribution but for the fact that he/she was not deferring, then the participant is benefitting.

If a terminated participant would not have received a match even if they were deferring, the participant is not benefitting.

Of course, if the terminated participant worked less than 500 hours, it doesn't matter anyway because the participant is excludable.

[Tom Poje]

I will assume by 'not participating' you mean 'not deferring'. there is actually a difference in terminolgy.

Otherwise, the responses given are correct, for the most part.

expressed slightly differently it might be worded as follows.

an ee who chooses to defer 0, is treated as included and benefiting for purposes of 401(k) coverage.

such a person receives a match of 0, so is treated as benefiting for 401(m).

If the plan has a last day requirement or an hours requirement, then there is no way the person could have gotten a match even if they deferred. Therefore, they are treated as included and not benefiting for 401(m).

The one exception would be a terminee with less than 500 hours. they can be excluded from coverage testing for 401(m). that is an OPTION. That would be my only correction to the above statements. if you had an HCE in the group you might not want to exclude the ees who terminated with less than 500 hours.

[MWeddell]

The plan doesn't allow employees to make after-tax contributions, right? Otherwise, (1) employees who weren't active on the last day of the plan year are start eligible to make 401(m) contributions, specifically after-tax contributions, during the plan year and hence are benefitting and (2) the last day of the plan year condition for the match becomes a BRF problem, not a coverage testing problem.

Also, the above answers tend to assume that you are not using snapshot data as of the last day of the plan year for coverage testing. If instead you use only employees on the last day of the plan year, it might be easier to satisfy coverage testing even if you now need to hit a ratio percentage of 77% instead of 70%. If all of this sounds unfamiliar to you, review the snapshot testing rules from Rev. Proc. 93-42.

Good luck!