Coverage Requirements

[Guest wlank]

New client wants to establish a Profit Sharing Plan. Business is a Fast Food restaurant. They have a large number of employees who are under 21, and/or part time. If I set eligibility to participate at 21 and 1, are there any coverage or discrimination problems? I just reviewed 410 (b) ant that seems OK, but I thought I might be missing something.

[J Simmons]

In the past, I've received D-letters for situations and plan design as you describe, even with employee data and x-test methodology submitted for IRS consideration. I see no coverage or discrimination problems.

[John Feldt ERPA CPC QPA]

Suppose 9 NHCEs are old enough and have 1 year of service so they all enter on January 1, 2008 when the plan is established. Suppose the husband and wife (owners) are the only 2 HCEs. Suppose the plan requires last day and 1000 hours.

Suppose one NHCE quits in February (under 500 hoursin 2008). Suppose in May, when summer starts, 3 of more NHCEs leave, each with about 650 hours.

On July 1, suppose 2 more NHCEs enter the plan.

Lastly, suppose 1 more NHCE leaves before December 31, 2008 and they only worked 900 hours. We have:

9

-1 (under 500 hrs - so excludable from the coverage test)

-3 (650 hours)

+2 new

-1 (900 hours)

= 6 benefiting (or benefitting?)

The plan has 100% of the eligible HCEs covered, but of the non-excludable NHCEs, only 6 of the 10 will benefit.

If this looks like a reasonably possible scenario for you plan, then when the plan is established, you may want to consider what is the most appropriate way for that to be resolved, so possible language can be included in the plan (or not in the plan, depending on the solution).

[Jim Chad]

This would fail the Ratio Percentage test for coverage. But it may pass the average benefits test. Everything sounds reasonable and and it would pass the safe harbor percentage test. The question is, would this pass the average benefits percentage test?

Your document probably has the option of choosing the "ratio failsafe" provision. You have to make a guess at the future to decide whether or not you want to choose it.