Restructuring a 401(k) for coverage

[MSN]

I have a plan that is not passing coverage with either the ration % or ABT. A colleague insists that you can restructure the plan into component plans to pass 410(b) testing for the 401(k) and 401(m) portions of the plan, as long as you test the plan as a whole for ADP/ACP. I don't believe this is possible. My basis for this position is Treas Reg 1.401(k)-1(b)(4) which indicates plans cannot be restructured to satisfy 401(k) testing and that the testing method used for satisfying 410(b) must be consistent with the method used to satisfy 401(k). Who's correct?

[Tom Poje]

the restructuring rules are found in 1.401(a)(4)-9©

in regards to this question 1.401(a)(4)-9©(3)(ii) last sentence

"...See 1.401(k)-1(b)(4)(iv)(B) and 1.401(m)-1(b)(4)(iv)(B) for rules regarding the inapplicability of restructuring to section 401(k) plans and section 401(m) plans."

it should be very easy using a black magic marker to cross that requirement out, though perhaps white out might be a better choice.

if you have enough 'otherwise excludables' you could disaggregate for testing, but that is about as close as you can come to breaking the plan into groups.

you have that many people excluded from deferring?

[MSN]

Yeah, we've got that many people excluded. The plan was for a franchise with many young workers and high turnover. The plan was setup for the individuals in a management role only and should have excluded HCEs as well, but id didn't. What I'm left with is about 100 nonexcludable NHCEs that were not covered by the plan, out of 115 total NHCEs, with all 3 HCEs eligible to participate.

Any ideas on how to correct? I'm thinking VCP asking that the situation be resolved by the taxable distribution of HCE accounts in current year? The client doesn't want to expand coverage to include non-management employees.

[K2retire]

All these young workers coming and going met the statutory eligibility requirements before they left?

[MSN]

Based on the figures I listed in the post, yes. The census had about 1000 total employees, most of which did not meet eligibility and were excluded from the coverage test.

[K2retire]

Coverage rules were created to prevent exactly what this client wants to accomplish -- covering only management or HCEs. If they don't want to expand coverage, they probably can't have a qualified plan.

[MSN]

Assuming that the only correction is expanding coverage for a moment...what would this correction look like? I think a QNEC of 1/2 the representative deferral rate for NHCEs (who were actually offered participation) plus the match associated with 100% of the representative deferral rate for coverage. The ADP/ACP needs rerun and possible corrective action. The plan would then have over 100 participants on the first day of a couple plan years (this is not isolated to a single year) so we should file amended 5500s (with audits). All in, the cost here would be in the neighborhood of $150K, which I'm fairly confident would not get funded.

I think that simply distributing HCE assets is a viable alternative under VCP. Of the 3 HCEs, only the one non-owner actually contributed. The two owners don't have contributions. I think this was a legitimate mistake, and feel this correction has a chance in a VCP application, but I haven't seen anything similar and would like to see how others on the board feel about the viability of this option. I inquired with the IRS a month ago and haven't heard back.