Coverage-"Fail Safe" language still allowed in document?

[Guest JMLSON]

I have a plan document that has a "fail safe" provision for mandatory passing of the RATIO TEST by adding back ineligible or terminated participants. I was told (by someone, and I don't remember who) that this provision is no longer allowed in a document. I am currently restating the AA for Safe Harbor in 1999 and don't know if I can use this provision in the restatement. Any suggestions?

[MWeddell]

As far as I know, the IRS discourages the use of fail-safe language, but it is still permitted if done in a way that precludes employer discretion so that a definite written plan and a definite allocation formula (if this is a defined contribution plan) is still intact. Hence, all testing assumptions need to be in the document itself.

My understanding of the IRS position is based on a 8/31/1994 internal IRS memo and an article in the Spring 1996 LA EP/EO Bulletin reprinted in the 6/10/1996 issue of RIA's Penswion & Benefits Week. If anyone has more recent IRS guidance on the issue, speak up please.

I'd continue to keep the fail safe contribution language in the restatement when you already have a current determination letter with this language in the document.

[This message has been edited by MWeddell (edited 09-01-1999).]