Correcting Coverage Failure

[Guest Midas]

I have a plan failing coverage. The adoption agreement does provide for Discretionary Non-Elective and does not provide for a Discretionary QNEC (only a QNEC to pass adp/acp testing). If I want to make a QNEC, as an employer contribution to increase the total benefit to pass the average benefits test, can you make the QNEC even though the document does not allow for a QNEC? Also, if I wanted to make a profit sharing contribution istead of a QNEC to assist the average benefit test, can I do a retroactive amendment to add a profit sharing option to the plan or does the option already have to exist in the plan and I can only do a retroactive amendment (permissible for a demographic failure within 9 1/2 months after plan year end) to INCREASE the profit sharing to get the AVB to pass?

[Tom Poje]

make a corrective amendment as permitted under 1.401(a)(4)-11(g)

[Guest Midas]

Tom - the question is can the corrective amendment ADD a profit sharing option that does not currently exist in the adoption agreement or is the corrective amendment limited in that it can only INCREASE a benefit accrual option that already exists in the adoption agreement? The wording in 1.401(a)(4)-11g is that you may "increase" an accrual to satify the average benefits test. My thought is "Adding" a benefit that does not currently exist is in essence "increasing" an accrual, but I am not sure if because the regs use the word "increase" that you are limited to only increasing a current existing benefit.

[rcline46]

I would be concerned that a 'corrective amendment' to a prototype plan may take it out of reliance.

[AndyH]

Midas, what is the cause of the coverage failure, and what money type is failing?

[Belgarath]

Midas - if you take a look at 1.401(a)(4)-11(g)(3)(vii)(A), this seems to me to say that you can only use the retroactive amendment to provide QNEC's to employees who were NOT (my emphasis) eligible. So it doesn't seem to me that you can simply increase or provide a QNEC to participants who were already eligible and receiving contributions. I also think Rclines's point is well taken that if whatever option is ultimately chosen isn't already present in the adoption agreement, that you're tossing it out of prototype status.

?? I hate 401(a)(4)!!

[Guest Midas]

Andy - If you take a look at 1.401(a)(4)-11(g)(6) Example 5, that is the exact example I am dealing with.

Belgarath - 1.401(a)(4)-11(g)(2) plainly states benefits accural may be increased to the "already eligible" population. If the document has a fixed formula, you may retroactively amend a plan for a demographic failure to increase the formula to increase the benefits, thereby assisting a pass on the average benefits. The other acceptable retro amendment is to change the document to allow additional employees to be eligible that is not currently eligible. I do not believe any of these corrective actions are in question as Sal in the ERISA Outline backs both of these correction methods. What is in question is if you do not currently have profit sharing option in the document, thereby you do not have a profit sharing contribution to retroactively "increase" can you retroactively add the profit sharing option. Is adding the same as increasing?

The QNEC is only required if you want to correct the 401(k) or 401(m) coverage tests independently. Then you make a QNEC equal to the average deferral for the year for the k and average conribution for the m. If you want to "increase" the employer source, you do not have to make a QNEC.

I don't see what you are saying about taking a prototype out of prototype status. How would you take a prototype out of prototype status by adding a discretionary Non-Elective source?

[Belgarath]

Midas - here's the first part of your original question, which I was addressing:

"I have a plan failing coverage. The adoption agreement does provide for Discretionary Non-Elective and does not provide for a Discretionary QNEC (only a QNEC to pass adp/acp testing). If I want to make a QNEC, as an employer contribution to increase the total benefit to pass the average benefits test, can you make the QNEC even though the document does not allow for a QNEC?"

When I look at (g)(2), it does indeed say that a corrective amendment may retroactively increase accruals or allocations for employees who benefited under the plan during the plan year being corrected, ...

However, if you move on the (g)(3)(i), it says that the amendment will not be given retroactive effect unless it satisfies each of the applicable requirements of (g)(3)(ii) through (vii).

Moving on to (g)(3)(vii)(A), it states that "In the case of a 401(k) plan, a corrective amendment may only be taken into account...for a given plan year to the extent that the corrective amendment grants qualified nonelective contributions within the meaning of 1.401(k)-6 (QNECs) to nonhighly compensated nonexcludable employees who were not eligible employees within the meaning of 1.401(k)-6 for the given plan year..."

I would still interpret this as not allowing the QNEC you mentioned as a valid correction for employees already eligible, as I stated previously. Can you provide your reasoning for believing otherwise? Anyone else have another opinion? I freely admit that I find the (a)(4) regulations challenging...

As to the prototype comment, it is simply meant as a caution - a prototype document generally cannot be amended to provide an option that is not already an allowable choice in the adoption agreement without removing it from prototype status. Sometimes there will be an "other" category in the applicable adoption agreement section where such an amendment can be made. But sometimes not, so it is something to be watched.

Of course, I just realized that it isn't a 410(b) coverage requirement that you're concerned with correcting, so I think that negates my answer, as the (g)(3)(vii) is concerned with a 410(b) failure, and you are apparently looking at the average benefits failure. Would help if I read the question carefully...

[Tom Poje]

ok, I got lost on exactly what is going on except plan is failing coverage.

it was not indicated which part of the plan failed coverage

e.g. 401k, 401m or nonelective.

the original statement said the adoption agreement provides for a discretionary nonelective contrib., but then the comment went on to say "can I add a profit sharing option."

but that is what a discretionary nonelective contribution is so I am confused.

now, based on the question, I would assume the plan is not failing coverage on the nonelective piece. that means it fails either 401(k) - which would really be strange unless it was a controlled group, or the 401(m) piece. no mention was made of match, though I see in example 6 of the regs under 11(g) you could increase in the match to individuals. never thought of that concept mentioned under the example.

anyway, as indicated, I am a bit confused as to the exact conditions of the plan. my apologies for missing something that may be staring me in the face.

[Guest Midas]

I knew, with my writing skilles, this one may be to difficult to communicate via these boards, but I thought I would give it a shot.

Please know I appreciate all the feedback, but I do not think we are getting to the answer and I sincerely apologize. As I am struggling to understand the appropriate corrective acction I am struggling to communicate effectively.

I will try to clarify:

1) This is a controlled group

2) The plan is a Safe Harbor Match Plan

3) The plan has not selected a Non-Elective source

4) The 401(k) and 401(m) coverage is failing due to the controlled group.

5) I do not wish to aggregate controlled group plans for testing as I will lose Safe Harbor status. The other qualified plan in the controlled group is not safe harbor.

6) I do not wish to make a QNEC to correct the 401(k) and 401(m) coverage failures.

7) I would prefer, based on the explanation below from the ERISA Outline(as my scenario fits it perfectly), to do a retroactive amendment to increase the benefit accrual (of the non-elective source, which is currently not selected in the document, but cetainly can be added without losing prototype status) to get the average benefits to pass. (see below)

Per Sal (under "Consequece of Failing Coverage")...

1.c. Additional contributions made to increase the average benefit ratio would not necessarily have to be QNECs. The corrective approach described in 1.b. and 1.b.1) above applies if otherwise ineligible employees are being added to the 401(k) arrangement or 401(m) arrangement. Suppose the arrangement covers enough employees to satisfy the nondiscriminatory classification test, but the average benefit ratio is under 70%. In that case, the amendment might simply provide for an additional employer contribution to be made to already-eligible employees, so that the average benefit ratio will increase to 70% or more. (See Treas. Reg. §1.410(b)-5 and Part C of Section V of this chapter for more details on the average benefit ratio test.) The additional contribution would not have to be a QNEC under these circumstances because we are not making the affected employees eligible for the 401(k) or 401(m) arrangement on a retroactive basis. Instead, the employer would be increasing the contributions made on their behalf in order to produce a better result under the average benefit ratio test. That contribution could be in the form of a profit sharing contribution, which is subject to a vesting schedule, rather than in the form of QNECs. But see the issue in 1.d.

below regarding the allocation of contributions to terminated participants who are 0% vested.

Now I go back to my original question of the word "increasing". I do not currently have a non-elective source TO increase. My question is, instead of retroactively amending the plan to INCREASE the benefit, do you think it is permissable to retroactively amend to ADD the benefit (which in essence is increasing the benefit since the original non-elective benefit is $0.00)

[Tom Poje]

I think your question was clear, but the details were confusing. now you cleared that up.

1.401(a)(4)-11(g)(2) next to last sentence says

In addition, for purposes of satisfying the nondiscriminatory current availability requirement of 1.401(a)(4)-4(b) for benefits, rights and features, a corrective amendment MAY MAKE A benefit right or feature available to employees to whom it was previously not available.

well, certainly the profit sharing (or QNEC) wasn't available to the employees so based on that it would seem you could add that brf.

your question (and certainly legitimate - I have never seen the situation before and I don't think I have ever seen it addressed before) is can you simply add something that wasn't available previously.

1.401(a)(4)-11(g)(3)(vi)© requires the corrective amendment to

'expand' the group of employees to whom the benefit, right or feature is available.

well, since no had this benefit previously, you certainly have 'expanded' the group, but the feature wasn't really 'available', so the ultimate question is can you do what you want.

I don't have a 100% I am sure of this answer for that question. 11(g)(2) implies you may make a benefit previously unavailable, but(3)(vi)© would seem to imply the benefit was already available, and you are merely expanding the group. But of cousre, you could argue you have indeed expanded the group.

My opinion is that the IRS really doesn't want plans to be disqualified, and I would lean toward a liberal reading of 11(g) that you truly are expanding the group of ees to whom the feature was available. In addition, the self correction program states that the correction method for failures relating to nondiscrim should provide benefits for NHCEs as found uner 11(g).

[Guest Midas]

Tom - Thank you for the analysis!!! It was the conclusion I was coming to (or was wanting to come to) but wanted some input or confirmation from others, as I also have not come across this specific scenario. Sorry for the initial confusion.

[Tom Poje]

Though it wont help now, you could do the following.

Special note: You can now quickly submit your questions for future IRS/DOL Q&A conference sessions by clicking this link: www.asppa.org/forms/irs_question.htm and submitting your questions online.