Document Question

[Guest MCarey1]

What are 410(b)(1)(B) ratio percentage fail-safe provisions?

Sorry if this is something so clear that I should know. Trying to determine on a individually designed document, if we should check yes that they should be included/

Thanks

[Blinky the 3-eyed Fish]

If you look up the code section, the answer is apparent.

[Guest abrandw]

In all likelihood, answering this question affirmatively will result in the plan document containing a provision which states that if the plan fails the minimum coverage test, and specifically the ratio percentage test, the employer can expand the group of employees eligible to share in the employer contribution so that the plan will pass. This problem could arise in a plan which conditions the allocation of employer contributions on completion of 1000 hours of service during the year and/or employment on the last day of the year. Under the 410(b) regs, terminated employees are not required to be counted if they have less than 500 hours of service when they terminated. If more than 500 hours, then the terminated employee must be counted for purposes of the ratio percentage test. With a small employer, this could result in the ratio percentage being less than 70%. The fail safe provision contains rules for expanding the group eligible to receive an allocation, i.e., if fail ratio percentage, allocate contributions to terminated employees starting with the employee with the most hours during the year.

[Guest Pensions in Paradise]

Keep in mind that if the plan does contain 410 fail-safe language, then you probably will be unable to use the ABT to pass coverage. For example, plan covers 6 out of 10 NHCE, and 2 out of 2 HCE, so your coverage ratio would be 60% and you would fail coverage. You run the ABT and discover that you pass coverage using the ABT. However, if your plan has the fail-safe language, you probably would be required to cover one additional employee rather than being able to rely on the ABT. Check the plan language carefully.

[Lynn Campbell]

I looked into this when we were doing GUST and concluded that adding fail safe makes things simpler administratively, since the correction is automatic. But it also seemed that fail safe language reduces flexibility in testing and might be more expensive for the client. I decided to leave the fail safe language out.

Does anyone agree/disagree? Thanks for all input.

[g8r]

I tend to agree. The fail-safe is easier to administer but it is less flexible. But, it does allow you to reallocate a contribution. If you don't have the fail-safe and you fail both the ration and ABT, then you must do a corrective amendment under 1.401(a)(4)-11(g). That requires an additional contribution and you can pick who will receive it -- provided you don't pick someone who is not vested. The fail-safe can give an allocation to non-vested participants b/c it's an allocation formula under the terms of the plan whereas -11(g) is a correction to prevent a coverage failure. So, without a failsafe you have broader testing options but have to watch out for the requirements of -11(g) should you end up failing the tests.