Coverage Failsafe Question

[Guest SWadd]

Prototype basic plan document contains failsafe language for plans that do not satisfy the minimum coverage requirements (ratio percentage). Generally speaking, would this provision only apply to employer nonelective (e.g. profit sharing) contributions? Could the failsafe also be used for an annual match? The plan I am testing has an annual match with a 1,000 hour requirement and last day rule and fails ratio percentage. The failsafe language is pretty standard - first group is to include employees who worked at least 900 hours, second group is 800 hours, etc. My question is can I bring in employees who belong to the group that I need to use if they did not make a deferral (and therefore are not eligible for a match) to satisfy coverage. Thanks.

[Jim Chad]

Great Question!

FWIW I think the answer is yes. I think you would bring in those people as directed by the document, whether they deferred or not.

At first glance this looks like a great deal for the employer. But those people that did not defer will hurt the ACP and ADP test.

[Guest SWadd]

The part that made me wrinkle my brow was the fact that employees who actually made deferrals were not included in the allocation (due to not satisfying the last day rule). I agree that by following the fail-safe language in the document this is the appropriate method but it just doesn't "feel" right to me...