Coverage Issues for Controlled Group-w/failing ADP

[justatester]

We have a client that is a member of a controlled group. As you know, for coverage purposes you must consider all members of the controlled group. We only recordkeep one of the plans. The group that is recordkept outside of our company does not pass coverage on its own and their ratio is so low that they do not pass using average benefits testing either. One would think the obvious solution would be to aggregate for coverage then aggregate all other tests as well. This is where the problem is. The plan that does not pass coverage is a "Safe Harbor" plan. Based on this, it is our understanding that while they could be aggregated for coverage, the Safe Harbor status does not permit them to be aggregated for ADP/ACP and other testing. In addition, the testing methods (current vs prior) are not the same. Our plan using the current year testing method for ADP and prior year testing for ACP.

The plans have submitted a VCP filing to the IRS asking to amend the testing method and for the safe harbor plan not to be safe harbor which would allow for aggregation. The IRS's initial response was not positive. They have said they will not allow the plan to be amended not to be safe harbor. At the point the IRS has not made a decision on what correction method to use. The VCP filing covers plan years 2003-2006. For the plan that is recordkept here, the 2005 and 2006 NDT test fails, but would pass on an aggregated basis. Since they are not confident in having the VCP approved, the plan will be making return of excess distributions (ROE) for the 2006 plan year. However, they did not make corrections for the 2005 plan year. At this point, I believe it is too late to simply make a distribution and since it is beyond the 12 month period following the close of the plan year, and a QNEC contribution would need to be made. In addition, it is our understanding that the plan can no longer apply the under 21/less than a year of service option for testing. By not applying this option, the ROE amount jumps from about $11,000 to over $900,000. Is anybody aware of any relief for de minis amounts? The ROEs on a disaggregated basis is about $45 per person.

Have you run into this situation before? Or do you have another suggestion that would allow the plans to be aggregated for coverage and then ADP/ACP?