410(b) failure in controlled group setting

[AndyH]

Member of controlled group discovers (in 2003) that it fails 410(b) for 2002. Controlled group has 4 other members with plans. Problem is that they have different plan year ends and therefore cannot be aggregated for 2002. Two have 12/31 year ends and 2 have 3/31 year ends (why??).

Aggregating the plans that do have the same year ends does not work. Aggregating a 12/31 year end with a 3/31 would work, however.

How to fix for 2002?

1.401(a)(4)-(11)(g) says correction can be done retroactively (by 10/15) by making QNECS to expanded group equal to average NHCE deferral (and same for ACP) but that would mean bringing in large number of employees of another company who already participate in a 401(k) plan. It would also mean substantial $$$.

Is there an alternative? Anybody found a different solution?

Can it be argued with merit that the QNEC can be offset by the employee's actual deferrals/match in their 401(k) plan?

Big problem with costly solution due only to plan year ends being different (and problem discovered late). Ideas?

(The free pass for coverage change is not available.)

[Tom Poje]

how bad was the ratio %? was it greater than the unsafe harbor %?

[AndyH]

ratio % 15%

safe harbor 20.75%

It would mean bringing in more than 100 people.

[Tom Poje]

ugh. Never seen a ratio % go that low - especially for a 401(k).

Is there anyway on of the groups could be treated as a QSLOB?

[AndyH]

Appreciate the suggestion but the QSLOB doesn't work.

What is strange about this is there could be two identical 401(k) plans except that they have different plan years. If one has a substantially higher HCE percentage than the other then it fails, even if benefits are identical. So one group gets big QNECS?

My situation is actually more complicated than I've let on because I have the same problem with some DB and PS plans in the mix, but 11-(g) permits a much easier correction than for a k or m plan. I just need to give people enough to be considered benefitting; whereas with a k or m plan a QNEC is specified equal to the average deferral or match percentage. Tough medicine.

So at this point we're even entertaining legal arguments outside of the 11(g) fix.

[Guest carsca]

Does the plan document's eligibility provisions offer any flexibility to suggest that a group of HCEs shouldn't have been covered for 2002?

[AndyH]

Unfortunately, no. The HCEs causing the failure are a stable group, with none of them hired recently. The failing plans provide for immediate eligibility, and, no, the otherwise excludable rules do not help.

[Guest carsca]

Is it too late to go to Top 20% on your HCE definition?

Would it help?

[AndyH]

Won't help. 1750 people including 19 HCEs.

[Tom Poje]

Andy,

based on your numbers

1750 ees, 19 hce

so 1731 nhce

1731 / 1750 = 98.9

always round down so I get safeharbor 21.50 rather than 20.75.

ugh sounds even worse.

well, actually I would fix to pass unsafe harbor % and plead facts and circumstances based on what you said

[AndyH]

Tom, my numbers quoted aren't exact; the NHCE count is actually higher.

Somebody other than me is still tweaking those but it does look like the concentration percentage is 99.1, so I think we're dropping to 99%, and it is a bit lower than you noted, but I agree with you that the target should be perhaps the unsafe harbor percentage of 20% anyway.

But I do appreciate all the comments. I'm both looking for a magical solution and trying to make sure we're not overlooking something. This can't be the first such situation where the unreasonableness of the "same plan year" requirement is being exposed.

[Guest pjb]

Wow. That's good to know this. I'm curious. Say we are just talking about just Plan A and Plan B with different plan years and Plan B gets the QNECs. Does every NHCE in Plan B get the QNEC? Can we pick a classification in PLan B who get the NHCEs? Are you planning on giving a QNEC for both deferrals and match for their respective average ADP and ACP percentages? Are there nonelective contribs?

I wonder how one would claim facts and circumstances if the issue is simply different plan years?

I think you're going to have to merge the plans.

[AndyH]

I think that we can choose enough people to give QNECS to make it pass, but I think that the group of people must meet the reasonable classification criteria, otherwise when we go back to test the enlarged group I won't get by the reasonable classification requirement to use the Average Benefits Test.

In other words, I can't test a plan under average benefits that includes all employees of Company A plus the 100 youngest, lowest paid employees of Company B. I don't think that'll fly past the reasonably classification requirement of the Average benefits test. I could do this if I could pass the ratio/percentage test, however.

And, yes, if we don't do the same thing for the match, that disaggregated "plan" will still fail.

Nonelective contributions are not required to be fixed in the same rigid (and expensive) manner. That can be fixed by giving people enough to be considered "benefitting", plus of course the fix must have "substance" and meet whatever else 11-(g) requires.

But, no, we don't need to merge. We just need to amend the plan year on a go forward basis so they can be aggregated (assuming that the tests then pass). Seems like a stupid rule to me.