Correction of Coverage Test

[Saiai]

Our client is a controlled group of corporations with each controlled group member maintaining its own 401(k) plan. With the expiration of Code Section 410(b) transitional relief for 2009, some of the plans failed the coverage test. We have looked at multiple testing methods. The most viable is applying the average benefits test and converting the allocation rate to a benefits rate through cross testing. However, the contribution required to correct the failure is extremely significant even though it is the least expensive of the alternatives.

Has anyone had experience or heard of the IRS, through VCP or otherwise, permitting the correction of a coverage failure by reducing and forfeiting contributions made for the highly compensated rather than making additional contributions for the non-highly compensated or adding eligible participants? Will the IRS consider alternatives to the traditional correction approach in light of financial or business hardship that would result from the traditional correction method? We understand there may be anti cut-back issues with our alternative approach.

Please let us know your thoughts or any ideas.

[david rigby]

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