Coverage Testing (410(b) ) Query

[Guest D_NITSCHE]

I have a 401(k) plan that has a last day/1000 hour requirement in order for an employee to share in the employer's profit sharing or discretionary contribution; this requirement is relaxed to >= 501 hours only for purposes of passing 410(b) coverage. The 70% ratio percentage test is being applied. Plan A has 100 employees of which 69 qualify for an allocation under the plan's terms; the other 31 terminated in the year with > 501 hours. I believe in this scenario all 100 employees should receive an allocation. Plan B is identical but the numbers are 98/69/29 respectively. It seems that here the 70% threshold is satisfied by allocating to the 69 and omitting the 29 altogether. This doesn't seem logical. Am I missing something here ??

[LCARUSI]

Let's assume initially that Plan A fails the 410(b) ratio percentage test as you described. (I'll explain later why that might not be true.)

The Plan Document probably stipulates that you provide a benefit to a sufficient number of the 31 employees so that the plan will pass the test. So you wouldn't have to give a benefit to the entire group of 31. The plan document might also specify how the additional employees are selected from the group of 31.

That having said, I don't believe you are applying the ratio percentage test properly and your plan A might, in fact, be in compliance.

I'll give you a reasonable scenario under which your plan A would be in compliance. You can then use this approach to do the calculation based on your actual numbers:

Total # of employees: 100

HCE group: 5

NHCE group: 95

Number of HCE satisfying last day/1000hr: 4

Number of HCE satisfying last day/1000hr: 65

HCE Percentage: 4/5=80%

NHCE Percentage: 65/95=68.4%

ratio percentage test: 68.4%/80%=85.5%

85.5% exceeds 70% ==> pass

[Guest ERead]

I must say that I agree with the example above. You need to take into account the HCE's before you say the plan fails. However, if you were just using those figures for the ease of a good example, that's alright as well.

In prior plans that I have delt with, you relax the provisions according to the Plan Document, 9 times out of 10, you start with the terminee's who were employed longest or had the last termination date before the Plan Year End. By using that method you avoid having to credit all 31 employee's.

Good luck.