Coverage Testing - adding terminees to get the test to pass

[Guest crosseyetester]

Is this an acceptable method? This stuff is still beyond me.

There is a control group where one of two companies has a profit sharing plan. The contribution is tested for coverage based on eligible participants in both companies. In order to make the plan pass the ratio test at 70%, additional participants are added based on looking at all terminees during the year who had over 1000 hours, then adding them one by one until the test passes. Is this an outdated methodology? How is this contribution vested? I looked in the plan document and there is no discussion of QNEC's in the 401(k) section. There is also a safe harbor match.

It has been suggested to me that the plan be amended to take away the last day restriction and add everyone who had over 1000 hours.

[J Simmons]

Outdated? No. It is only permissible in the manner, if any, described in the plan document. The more usual plan provision tries to favor those yet employed on the last day, so it does away with the year end requirement but only credits those that quit before the last day of the year with 1 hour of service per each week worked in the year before they quit. Those yet employed on the last day of the year but who had less than 1,000 hours of service are credited with their actual hours. Then as the hours threshold is dropped to pick up the minimum number of additional participants necessary to pass minimum coverage, it generally favors those employed on the last day of the plan year but with fewer hours over those who quit before year's end but have higher levels of actual hours.

This method actually saves money because it picks up and requires a contribution for employees that generally earned less than those that had more during the year, but quit before year end. This method is also more attractive to employers--they tend to have a greater aversion to picking up an employee that quit than they would have to picking up an employee who is yet working, albeit "part time".

Those picked up in this process are subject to the same vesting rules as those who otherwise had a benefit accrual year. If those picked up in this process receive a profit sharing contribution allocation and the plan imposes a vesting schedule, then the vesting schedule applies to the allocation of that contribution to any picked up employee. If the picked up employee receives a QNEC and/or safe harbor match, he or she is 100%, immediately vested in it.

I would either amend to have a provision like the one described in the first paragraph--if that isn't what the plan already provides. Or drop both the year-end employment and the hours to just 500, and you'll by definition satisfy minimum coverage.

[austin3515]

What JSimmins is referring to in his first paragraph is "fail-safe" language - in other words, if the Plan is failing coverage, then participants not benefitting will automatically be brought in (one by one) until the test is passed. So the Plan, as written, will never fail coverage. If your plan has it will read something like "if the plan does not pass 410(b), then..."

If your plan does not have this, it could be good news - plans with fail-safe language are precluded from using the average benefits test, which you might pass!! B/c HCE's are generally older than the employees, cross-testing the average benefits generally helps.