410(b) "Free Ride"

[Guest jdeets]

Our company sponsors a 401(k) plan. By design, the Plan excludes a certain class of employees from participation. For 1997, the plan barely passed the 410(B) coverage test. Effective 12/31/97, we sold off some business units. As a result, the 410(B) coverage test has dropped to about 55%--the units sold off did not employ the exluded class of workers.

For Plan Year 1998 (calendar year plan), the 410(B) test is shot. However, I understand that there are rules regarding a "free year" when there is a change in coverage as a result of a transaction. In our case, will these rules allow us to ignore the 410(B) problem for this plan year, and correct it next year? Do such rules still provide relief for the plan, notwithstanding the fact that we could have covered all these employees this year and avoided any problems? (Hindsight is always 20/20.)

[Chester]

I got the impression from your posting that the 410(B) ratio test did not pass. However, that does not automatically mean thatyour plan does not pass the coverage test. If your plan passes the non-discriminatory classification test and the average benefits test, then your plan is deemed to satisfy the coverage test. For more information, please see IRS Regs 1.410(B)-4 and 1.410(B)-5.

[MWeddell]

You'll want to look at Internal Revenue Code Section 410(B)(6)©. There are no regulations on this transition period, so make sure you look in the Code itself. Essentially if your coverage test passed immediately before the corporate transaction and there were no other significant coverage changes, your coverage test is treated as passing until the end of the first complete plan year after the corporate transaction, 12/31/98 in your case.

[Wessex]

Section 1.410(B)-2(f)of the regulations briefly addresses the Section 410(B)(6)© rule regarding coverage after acquisitions or dispositions. The regulation adds an additional requirement -- there must have been no significant change in the PLAN or in the coverage of the plan.