Excludable for coverage

[austin3515]

Standardized profit sharing plan adoption agreement, everyone gets 3% of pay for safe harbor. Plan applies the "last day rule if <500 hours" allocation condition. There are just 3 NHCE's.

One participant who gets the 3% of pay is terminated with 300 hours, so is not benefitting under profit sharing. Because they are benefitting (i.e., getting the 3%), they are not excludable under coverage (and the plan passes coverage). So for this Plan, the rate group testing is failed (i.e., safe harbor allocation model is blown because of different allocation conditions on the SHNEC and the PS).

Okay, so we restructure the Plans. The person described in my second paragraph goes into their own plan. They're an NHCE, so that plan passes b/c it has no HCE's.

My question is really on the second plan - can we treat the participant in the first plan as excludable? The condition for excluding a term with a break is that the sole reason they're not benefitting under the Plan is the fact that they were not employed on the last day. That condition does not seem to be met here, which means that he is not excludable, which means that the plan failed the rate group test and must be amended. Am I missing something?

I guess what I'm really getting at here, is can a standardized plan be considered discriminatory in this scenario? How can that be?

[Tom Poje]

my guess is that you have a situation which would be similar to having 2 plans - one with last day/ 500 hours for nonelective and another for the SHNEC without conditions. if you have 2 plans you have to test using the plan with the least restrictive conditions.

[AndyH]

I don't think you have anything to test. You have two component plans, as Tom said, each of which by itself is a safe harbor. Each individual in each component plan plan is treated as not excludable and not benefitting in the other component plan.

You have restructured the plan into to component plans each of which (I presume) pass 410(b) and 401(a)(4) as a safe harbor, albeit on a restructured basis.

I'm not sure what this exercise accomplished but it is as you described, modified here.

[austin3515]

The second plan only passes coverage if the person in the first plan is excludable. So the heart of my question really becomes, is the guy from Plan 1 excludable for coverage under the second plan?

So Tom, it sounds like you're leaning to the fact that my standardized plan fails coverage?

[Archimage]

You don't fail coverage. You fail 401(a)(4) non-discrimination. Will need an -11(g) amendment.

[AndyH]

This is guesswork without more info. How many HCEs are there and what are they getting? Why can't it be general tested?

[Tom Poje]

would agree with Archimage, plan does not fail coverage. it was indicated that all ees in some way shape or form have received a nonelective contribution. but there appears to be 2 'classes'. some received a shnec and others received a different %. this it is nondiscrim that needs to be tested. now, depending on how much the HCE received you may have to worry about the gateway minimum if the desire is to cross test to pass testing. of course, if the document requires the gateway, then no corrective amendment is needed as you have to put it in. if we are talking about 9 1/2 months after plan year end that is a very good thing.

my feeling is that no, you could not 'exclude' this person from component testing, again, I would view this as a situation with two different eligibility conditions to obtain a nonelective contribution and you would have to go with the least stringent. (but then again I could be wrong) I don't really see the situation you describe that much different than if the plan had no SHNEC and the person you described was there on the last day.

He still only received 3% vs whatever else the other people received, and therefore you must nondiscrim in some way.

[austin3515]

cross-testing may or may not work, but that's not the point. The point is this is a standardized plan, and I get the feeling that eveyrone seems to think it's at least possible to fail 401(a)(4).

Example:

1 HCE, getting 3% SHNEC and Integrated PS

3 NHCE's, 2 of whom benefit in both the SHNEC and the PS, one of whom gets ONLY the 3% SHNEC, because they were terminated with 300 hours of service.

Forget cross-testing, assume the HCE is 21 and the NHCE's are in their 50's.

Does this plan fail 401(a)(4)? Am I missing any pertinent data?

[Tom Poje]

I think everyone (or at least most) would agree based on the facts you have put forward a standardized plan 'could' fail a(4) which would seem contrary to the ideas behind a standardized plan. This may be an indirect result of how safe harbor plans operate (and the fact they are fairly recent on the scene)

If a standardized plan is also a safe harbor 401k then the eligibility conditions for the safe harbor nonelective are 'none'. given the fact the plan is standardized, it would seem to me that it 'should' be impossible to put further restrictions on any additional nonelective contributions. that would seem inconsitent with the idea of 'standardized'. but that is only an opinion. (e.g. if I recall, a standardized plan must test ADP and ACP on the same basis, where a nonstandardized could test ADP on prior year and ACP on current year, so maybe something similar holds for a plan with a SHNEC - you cant have different eligibility for a SHNEC and any other nonelective contributions)

on the other hand, the IRS has informally stated a standardized plan with immediate eligibility for anyone hired on such and such a date, and everyone hired after that date has a one year wait will not fail because the plan is 'standardized' so maybe they would use the same logic. given that fact, they may also conclude the same in the case of a safe harbor standardized plan.

Interesting question, I'll write someting up for a Q and A and submit it.

[austin3515]

Let me know what you hear!!!

[Tom Poje]

unfortunately Q and A's take awhile.

on the other hand, there is a good chance I will be working on such committee for ASPPA soon, so we will see how things go. (As if I don't have enough on my table!)

[Kevin C]

Interesting discussion. The following two items are from Rev. Proc. 2000-20.

Prototypes are not allowed to test for 401(a)(4) using benefits. (Section 8, .03 7)

Standardized plans and nonstandardized safe harbor plans are required to satisfy design-based safe harbors described in the regulations under §401(a)(4) (Section 3, .09 1)

If the IRS issued a favorable opinion letter for a standardized prototype, they made a determination that the document satisfied all of the requirements for standardized prototypes. The reasoning in this thread leads to a conclusion that our standardized prototypes do not satisfy the 401(a)(4) SH requirement. If this is true, they should not have received favorable Opinion Letters. If the IRS made a mistake when they issued the Opinion Letters, can we still rely on the Opinion Letters?