Related employers - 1 failing coverage

[Guest M. Martin]

I have two related companies (ASGs) where one is passing the coverage test but the other is not (both are top heavy).

The Company A plan provides for 401k, matching and cross-tested PS contributions. For the PS portion, 3 HCE’s received a $27k (or 12.272727%) contribution and 8 HCEs & 8 NHCEs receive a 4.50% contribution, to be eligible for a contribution participants must be employed on the last day and worked at least 1,000 hours.

Company A passes coverage and the cross-testing with no problem and would prefer not to increase their contribution above the 4.50% level.

The plan for Company B has a cross-tested PS contribution only with 1 HCE receiving a 20% contribution and 1 NHCE who did not receive a contribution because she terminated before 12/31/06. Company B fails the coverage test.

Can Company B adopt a corrective amendment to provide for a 5% contribution to the terminated participant which would then allow Co. B to pass the coverage test and satisfy the minimum gateway requirement and not impact contribution percentage that must be given to the Co. A participants (i.e. min. gateway)?

[Tom Poje]

well, lets see if I have the picture

affiliated service group so all employees must be included in the denominator.

you have 9 total NHCE and 12 total HCE

aggregation of plans is permissive which you dont want to do.

so

plan A nhce 8/9 = 88.9%

11/12 hce 91.6%

so coverage not a problem.

plan B nonelective only nhce 1 / 9 = 11.11% (assuming a corrective contribution)

hce 1/12 = 8.33%

so coverage is not a problem either.

gateway appears to be covered in either plan by itself.

so if the 5% is sufficient to get the NHCE in the rate group of plan B that would work (if the NHCE is 0% vested then vesting must also be applied to the corrective amendment.)

[Guest M. Martin]

Tom,

Thank you very much, it has been a very interesting year with several of my new conversion clients!