Failed coverage

[Guest EPS2]

Plan is a Standardized Corbel Prototype 401(k) plan that is top heavy

Because two terminated participants with more than 501 hours are not getting a top heavy allocation (as provided in the document), plan does not pass coverage. It doesn't pass the average benefits test either.

I've read the document, but where does it explain how to fix this without it being a non-standardized fail safe plan? The only place I see it being addressed is in section 4.3(l). Doesn't it say there that the method there is to be used "if this subsection apllies.." ? what if the subsection doesn't apply: Standardized plan ???

The Adoption Agreement provides for HCE to get the top heavy allocation, so I can't not allocate to them.

Do I have the sponsor adopt a 11(g) corrective amendment giving a 3% top heavy to the terminated participant with the latest termination date as it says to do for a non-standardized plan using the fail safe provision? We are still withing the 9 1/2 month correction period.

Do I give the top heavy to everyone...basically calling it a normal 3% profit sharing allocation? Then both those terminated participants will get an allocation, which doesn't make the sponsor very happy.

Could someone help me on this...at least lead me to where on earth I can find this in the document? Am I reading this wrong or what???

[Tom Poje]

something is not being fully explained - or its Friday and my brain has already left for the day which wouldn't surprise me.

a standardized plan is guaranteed to pass coverage - terminees with more than 500 hours are required to receive a contribution. In other words, if the only contribution made was 3% top heavy and those terminees didn't receive it, then why not simply allocate 3% profit sharing - this would also satisfy top-heavy as well.

[Sully]

I recommend looking at Section 4.3(f). Section 4.3(b)(2)(iii) may also apply.

[Kevin C]

It's Friday here, too, but wouldn't it take care of the problem if they make a PS contribution that is a little larger than the required TH minimum? When it is allocated, everyone eligible for the TH minimum gets 3% and the terms with >501 hours share in the remaining PS. For coverage, they only need to get a contribution, it wouldn't have to be the same % of pay as the others.

It’s a standardized prototype, so they have an opinion letter that says they have a 401(a)(4) SH allocation.

[Guest EPS2]

something is not being fully explained - or its Friday and my brain has already left for the day which wouldn't surprise me.

a standardized plan is guaranteed to pass coverage - terminees with more than 500 hours are required to receive a contribution. In other words, if the only contribution made was 3% top heavy and those terminees didn't receive it, then why not simply allocate 3% profit sharing - this would also satisfy top-heavy as well.

The employer does not want to HAVE to give the two terminated participants any profit sharing allocation. If he make the minimum Top Heavy contribution to those participants that are actively employed and not to those that are not actively employed, the ratio percentage test does not pass because we have two employees that are not benefiting (3 HCE, 6NHCE - 3HCE benefit, 4NHCE benefit)

If I cross test the plan, and it passes that should be okay, right? I don't see this addressed in the document anywhere. I've read both sections that were suggested...nothing.

[Guest EPS2]

It's Friday here, too, but wouldn't it take care of the problem if they make a PS contribution that is a little larger than the required TH minimum? When it is allocated, everyone eligible for the TH minimum gets 3% and the terms with >501 hours share in the remaining PS. For coverage, they only need to get a contribution, it wouldn't have to be the same % of pay as the others.

It’s a standardized prototype, so they have an opinion letter that says they have a 401(a)(4) SH allocation.

The whole problem lies with the fact that funds are very scarce for the employer. He cannot afford to put in any extra if he doens't have to. That's why I'm trying to make sure that if I allocate just the Top Heavy to those that are employed on the last day of the plan year, and pass the Average Benefits Test (because ration percentage won't pass) I'm good to go.

[Kevin C]

You cannot cross test a standardized prototype. For GUST approved prototypes, cross testing was not even allowed in non-standardized prototypes.

Standardized plans by design benefit all non-excludable employees. I don't know if you can use the average benefits test. But, your original post said it fails average benefits, too.

Try adding $50 to the top heavy minimum and allocate it all as a PS contribution. Then run the ratio percentage test.

[Tom Poje]

ah, thats a little more detailed info of whats going on.

a couple of points, based on what you said, but always need to verify:

plan is top heavy

must also be a 401k and at least 1 key employee must have deferred (otherwise there should be no top heavy due)

plan might pass on an allocation basis if you impute disparity

oh wait, its Friday the 13th. nothing will work no matter what.

[Guest EPS2]

You cannot cross test a standardized prototype. For GUST approved prototypes, cross testing was not even allowed in non-standardized prototypes.

Standardized plans by design benefit all non-excludable employees. I don't know if you can use the average benefits test. But, your original post said it fails average benefits, too.

Try adding $50 to the top heavy minimum and allocate it all as a PS contribution. Then run the ratio percentage test.

Thank you so much for your reply. I didn't know that standardized plans could not be tested using the average benefits test. So in this situation, I really have no other options other than the extra $50.00 allocation, or to allocate a 3% profit sharing allocation to all.

So, basically what we can do is allocate a $50.00 profit sharing contribution to all. The two termintaed participants will get some, but very little (a pain to have to pay them out again, but oh well), then everyone else gets the 3% top heavy. 410(b) passes because everyone now is benefiting...right?

[Guest EPS2]

ah, thats a little more detailed info of whats going on.

a couple of points, based on what you said, but always need to verify:

plan is top heavy

must also be a 401k and at least 1 key employee must have deferred (otherwise there should be no top heavy due)

plan might pass on an allocation basis if you impute disparity

oh wait, its Friday the 13th. nothing will work no matter what.

It does pass if I impute disparity, but I was just told that you cannot use the Average Benefits test in a standardized plan.

This is really confusing me because I always thought that the 410(b) test which is the coverage test that has to pass has two parts: ratio percentage and average benefits test...if the ratio percentage test doesn't pass, then you go on to the average benefits test which looks at the allocations, not just who is benefiting...

Is it true that I cannot use the average benefits test in a standardized plan? If the coverge test does not pass using the ratio percentage, then that's it, it doesn't pass, and you basically are forced to give terminated participants an allocation.

Okay...to add a little more to this: If I am using the statutory exlusion rule for the ADP and ACP testing, I know that I have to use the same exlusion rule for the coverage testing for these portions of the plan, but what about the 401(a) portion? Can I include the participant in 401(a) testing that was exluded from 401(k) and 401(m) coverage testing?

Any clarity on this would be sooooo appreciated.

Thank you.

[Kevin C]

Until I saw your example, I would have said a standardized plan would always satisfy the ratio percentage test. I don't know if you can use average benefits or not. You can't cross test for 401(a)(4) in a standardized prototype.

Unless someone sees a problem with it, I think a small increase in your profit sharing contribution takes care of your problem. I just picked $50 out of the air. If they receive an allocation, they are benefiting for 410(b) purposes. Then you pass ratio percentage.

There is an issue in the 401(a)(4) regs about when the TH minimum is treated as being available on the same terms as the regular PS contribution that can affect whether or not your PS allocation method is a 401(a)(4) SH. But, this is a standardized prototype, so you have the IRS's written opinion that your PS allocation is a 401(a)(4) safe harbor allocation. That's why I mentioned the opinion letter in my prior post.

[Mike Preston]

I'm confused. If this is a standardized prototype, then all you have to do is follow the terms of the plan to pass both 410(b) and 401(a)(4). The plan should tell you what to do to ensure that you pass. Are you sure that your plan allows the allocation to be made solely to those who are employed on the last day of the year? See Tom's message (#2). I would be surprised. The rest of this thread doesn't mean much if your plan already has provisions in it that you must adhere to.

[Kevin C]

Mike,

I see the problem as he wants the only employer contribution to be the top-heavy minimum. The two who terminated with more than 501 hours share in the PS, but the funds contributed are used up for the TH minimum before they get an allocation.

[Guest EPS2]

I'm confused. If this is a standardized prototype, then all you have to do is follow the terms of the plan to pass both 410(b) and 401(a)(4). The plan should tell you what to do to ensure that you pass. Are you sure that your plan allows the allocation to be made solely to those who are employed on the last day of the year? See Tom's message (#2). I would be surprised. The rest of this thread doesn't mean much if your plan already has provisions in it that you must adhere to.

As far as I can tell: Yes, it clearly states that only those employed on the last day of the plan year get an allocation in section 4.3(h): It says that the minimum allocation shall only be allocated to the participants who are employed by the employer on the last day of the plan year, including employees who have failed to complete a year of service. Both of these particpants in question were credited with over 501 hours, but it says "including"... so in my mind it's everyone that is not employed on the last day does not get an allocation of the top heavy minimum.

That's just it: I don't see, or can't find anything that gives me any guidance on this situation.

[Kevin C]

You are looking at the top-heavy language. If the language in the Corbel document is similar to that in our documents, the top-heavy provisions override the regular allocation provisions to the extent needed for the TH minimums to be satisfied.

Add a few more $ to the PS contribution and follow the terms of the plan. The two terms with >501 hours will get an allocation under the regular PS allocation. Then, you will pass the ratio percentage test.

[Guest EPS2]

You are looking at the top-heavy language. If the language in the Corbel document is similar to that in our documents, the top-heavy provisions override the regular allocation provisions to the extent needed for the TH minimums to be satisfied.

Add a few more $ to the PS contribution and follow the terms of the plan. The two terms with >501 hours will get an allocation under the regular PS allocation. Then, you will pass the ratio percentage test.

This plan is also integrated, so I guess I need to allocatate two contributions, one small allocation ($200.00)that covers the integrated % that gets allocated first, and the rest pro-rata and is not allocated as top heavy so those two terms get some, then one that is the top heavy allocation that will make up any allocations less than 3%, and not allocate any more to the two terminated people. Right?

Please...someone just shoot me.

By the way: I have a question posted for Sunguard Corbel about this issue. It's driving me crazy...

[Bird]

EPS2, can you confirm that a Key deferred 3% or more so that there really is a required top heavy minimum? If not, then any PS contribution must be allocated under the terms of the document, and the two terms are included; end of discussion. (FWIW I would guess that it is allocated pro rata on the first 3% so TH would be satisfied with exactly 3% but that's a different issue.)

If so (a Key deferred 3% or more), then what you'd like to do is say "oh darn, we need a top heavy contribution to satisfy that requirement - 3% to anyone employed on the last day of the year." And those two don't get that; you don't put in a dollar more or less so there's no profit sharing, right? In that scenario, you are just following the terms of a standardized prototype plan, and should not have to test for coverage, even though the TH contribution would fail coverage if you tested it. (I can't say I'm 100% sure and would have to research exactly what it means to have a Std Prototype...but I'm sure someone else will jump all over that if it's not so. In any event it seems that the discussion keeps coming back to adding a little bit to the PS allocation to satisfy TH, but as noted, it's probably pro-rata anyway up to 3%, but that is not responsive to your problem of keeping these two from getting a contribution.)

[K2retire]

If the top heavy minimum goes in as a QNEC rather than profit sharing, I believe that will accomplish what Bird is suggesting. The employer will need to decide if the QNEC 100% vesting is better or worse than giving a profit sharing contribution to the terminated employees.

[Guest Sieve]

How about this?

STEP 1: Make a small contribution to the Plan as a discretionary PSP (so that everyone gets $50 or something more than that, as was suggested earlier), allocate it, and then . . .

STEP 2: When the Plan fails 410(b)--as it appraently will--allocate an additional $50 (or whatever the appropriate amount is) to the terminated employees according to the Plan's 410(b) correction provisions (Corbel Basic Plan Doc., Section 4.3(m)) until the coverage failure is corrected.

STEP 3: Now that you pass 410(b), allocate the TH minimum contribution above the $50 (or whatever), with the terminated employees getting nothing additional per plan terms.

As has been stated, the plan passes 410(b) because it was corrected to do so (in Step 2) according to plan terms. And, TH does not have to be tested separately for non-discrimination if your PS allocation is a safe harbor (such as comp-to-comp). (Treas. Reg. Section 1.401(a)(4)-2(b)(4)(vi), especially -2(b)(4)(vi)(D)(3).)

Voila!

[Bird]

Sorry Sieve, this is s standardized prototype and they have > 501 hours so they will always share in PS.

But I think you provided the cite that's needed to allow TH only and not test it for non-discrimination, which is really what this thread is about (I think).

[Guest Sieve]

Oh. Well, at least something from the post might be salvageable . . .

[Kevin C]

Non-discrimination under 401(a)(4) isn't an issue because it is a standardized prototype. The IRS Opinion letter for the document says the allocation formula is a 401(a)(4) safe harbor allocation.

The problem is coverage. A plan that is designed to automatically pass coverage actually fails coverage at a certain level of contribution.

I see two choices. You can spend time trying to figure out if the apparent coverage failure jeopardizes the qualified status of the plan, or you can increase the PS contribution by a few $ and the problem goes away. Pick a number, $5, $10, $50, ... It doesn't really matter as long as the two terms with >501 hours receive an allocation. It seems like an easy choice to me.

[Bird]

Kevin C, when you say "increase" the PS you mean "make" a small PS? (And then add the TH minimum, which excludes the 2 terms.)

[BG5150]

Pick a number, $5, $10, $50, ... It doesn't really matter as long as the two terms with >501 hours receive an allocation. It seems like an easy choice to me.

Why not just use a penny then? Any allocation greater than zero would mean a person is benefitting.

Secondly, might the Employer only have to give a contribution to one of the people? Earlier it was noted the population was: 3 HCE / 3 HCE benefitting, 6 NHCE / 4 NHCE benefitting. So just one more NHCE is needed to pass coverage: (5/6) / (3/3) = 83.33%.

I thought the "standard" way to correct the coverage test was to bring people into the allocation from latest term date to earliest until the test passes. (And I thought I've seen to use lowest compensation to highest comp.)

[Kevin C]

What I mean is that if the TH minimum is $1,000, then allocate $1,050 as a PS contribution. The PS allocation gets adjusted so that the TH minimum is satisfied. It's still a PS allocation. There will be a little left over after making sure everyone eligible receives the TH minimum, so the two terms get a small PS contribution.

There is no need for fail-safe provisions. Both of the terms are already eligible to receive the PS. All you have to do is make sure the PS contribution is large enough that the terms receive some of it.

One cent may not work because there are two terms and rounding to consider. $1 would work, but then you would have the client complaining that the checks for the two terms were less than the postage needed to send their checks to them.

[BG5150]

Kev,

I see what you mean, now. I thought you meant an allcoation of $5, 10, 50 for each of the two people in question.

[Bird]

What I mean is that if the TH minimum is $1,000, then allocate $1,050 as a PS contribution. The PS allocation gets adjusted so that the TH minimum is satisfied. It's still a PS allocation. There will be a little left over after making sure everyone eligible receives the TH minimum, so the two terms get a small PS contribution.

OK, I think that works. I thought you were saying something else.

[Guest EPS2]

You are looking at the top-heavy language. If the language in the Corbel document is similar to that in our documents, the top-heavy provisions override the regular allocation provisions to the extent needed for the TH minimums to be satisfied.

Add a few more $ to the PS contribution and follow the terms of the plan. The two terms with >501 hours will get an allocation under the regular PS allocation. Then, you will pass the ratio percentage test.

Thank you all for responding to my question. After all the responses I got, I figured the best thing to do (and possibly what I should have done in the first place) was to ask the Corbel people, since they were the ones that wrote the document.

I thought I'd cut and paste the response I got here, so that it may help someone else that has the same question.

Below is the answer I got from the "horses mouth" if you will...

This is one of those "gaps" in standardized plans. You are correct that it should automatically pass coverage and nondiscrimination. So, you have 2 options (1) rely on the opinion letter and don't worry about the issue, or

(2) see if you pass coverage using the average benefits tests (and if not, make a 3% contribution for all participants or do a corrective amendment under 1.401(a)(4)-11(g)).

You do have reliance on the opinion letter so technically you can just ignore the issue if you want.

I feel good now...

[SMB]

I have always thought that a "standardized" prototype plan - by definition - had to include in the allocation of the employer contribution: (1) any active participant still employed on the last day of the plan year (regardless of credited Hours of Service in that plan year) and (2) any participant who terminated during the plan year with more than 500 hours - which is why a "standardized" plan is deemed to always pass coverage and non-discrimination. No? Or, where have I been and what else have I missed along the way?

[Bird]

SMB, you're right, but the idea is that if you allocate a small PS contribution that way, it won't meet top heavy requirements. So the top heavy rules kick in, first allocating 3% to all participants employed on the last day of the year. The tiny bit remaining gets allocated as a "regular" PS contribution, and the terminees will indeed get their "fair" share of that allocation.

BUT, that assumes a key made a 401(k) contribution of at least 3%...EPS2 never did clarify that a key made such a 401(k) contribution. If not, then you are absolutely correct, the contribution is simply allocated to all, including the terminees, from the first dollar up to 3%, because that is what the plan says, and it will satisfy top-heavy (if everyone, including the keys, gets 1%, that satisfies top-heavy). It's a "key" (groan) point to the whole argument.

[Guest EPS2]

SMB, you're right, but the idea is that if you allocate a small PS contribution that way, it won't meet top heavy requirements. So the top heavy rules kick in, first allocating 3% to all participants employed on the last day of the year. The tiny bit remaining gets allocated as a "regular" PS contribution, and the terminees will indeed get their "fair" share of that allocation.

BUT, that assumes a key made a 401(k) contribution of at least 3%...EPS2 never did clarify that a key made such a 401(k) contribution. If not, then you are absolutely correct, the contribution is simply allocated to all, including the terminees, from the first dollar up to 3%, because that is what the plan says, and it will satisfy top-heavy (if everyone, including the keys, gets 1%, that satisfies top-heavy). It's a "key" (groan) point to the whole argument.

Yes. The keys did make deferrals. I apologize for not making it clear. I try to put as much information as possible on these questions so as to not confuse. sorry

[BG5150]

BUT, that assumes a key made a 401(k) contribution of at least 3%...

It's not only 401(k) contributions. You must also take into consideration matching, profit sharing and/or forfeiture allcoations. So if a key EE had a 2% deferral rate and there was a 50% match, that would get the key EE to a 3% allocation...