Otherwise excludable employee

[thepensionmaven]

We are working on the contribution for a new comparability plan (no deferrals) for the 2009 plan year. There are two groups- owners and all other employees. Eligibility is ages 21 and 1 year of service, entry is 1/1 nearest completion of eligibility.

Definition of compensation is w-2 for all tests and limits.

One of the NHCEs terminated in 09 with less than 500 hours. ABT was passed and so was 401(a)(4) for prior year.

Plan passes gateway but not ABT with current NHCEs for 2009. We do have an employee hired 9/08 who would otherwise be excludable because she had not met the 1 year eligibility

IF we bring this employee in as of 1/1/09, all tests are passed.

Is this Ok and must this person receive credit for 1 year of service as of 12/31/09?

[Tom Poje]

you did not indicate if the NHCE who terminated with less than 500 hours received a contribution or not.

a corrective amendment made under 1.401(a)(4)-11(g)(2) says you can grant an alloaction to an individual who did not benefit during the year. So you could put in a corrective amendment to provide something to a terminated employee who did not benefit (assuming the amendment also provides 'substance' (e.g. vesting if the ee was 0% vested)

or a corrective amendment may make a benefit, right or feature available to an employee whom it was not previously available.

all this assumes your document does not contain fail safe language in regards to coverage testing (in which case you can't use the avg ben test for coverage purposes anyway)

[thepensionmaven]

Sorry, the terminated employee worked less than 500 hours.

Would you have any language for the corrective amendment to make the feature available?

And exactly what is the failsafe language that would not make this possible?

Thank you.

you did not indicate if the NHCE who terminated with less than 500 hours received a contribution or not.

a corrective amendment made under 1.401(a)(4)-11(g)(2) says you can grant an alloaction to an individual who did not benefit during the year. So you could put in a corrective amendment to provide something to a terminated employee who did not benefit (assuming the amendment also provides 'substance' (e.g. vesting if the ee was 0% vested)

or a corrective amendment may make a benefit, right or feature available to an employee whom it was not previously available.

all this assumes your document does not contain fail safe language in regards to coverage testing (in which case you can't use the avg ben test for coverage purposes anyway)

[Tom Poje]

failsafe language is language in a document that makes is 'safe from failing' coverage.

usually worded something like 'if plan fails 410(b) then provide a contribution to the terminated employee with the most hours'...

the drawback of having failsafe language is that you can only use the ratio % test to pass coverage, so a lot of documents do not include the language. and if you have it, you have to follow the terms of the document and use it.couldn't tell you where to look in your particular document, I think Corbel documents had it in section 4, but its been a long time and we don't use it in anything we presently have.

as for language of a corrective amendment, hmmm, something like the following:

Amendment to the XXXXX Plan

In order to satisfy the general non-discrimination test under 1.401(a)(4)-2© or the coverage test under 1.410(b)-2 for the Plan Year ended xx/yy/zz , and in accordance with the provisions of IRC 1.401(a)(4)-11(g) regarding corrective amendments, the Plan is hereby amended as follows:

For the Plan Year above only, an additional Allocation of % of Compensation or $ shall be provided to the following Participants:

Russel Cattle

D. Barbara Seville

Roland Butter

This amendment has been executed this _______________ day of _________________, 20___.

By______G. I. Luvmoney_____________

[thepensionmaven]

Thanks.

failsafe language is language in a document that makes is 'safe from failing' coverage.

usually worded something like 'if plan fails 410(b) then provide a contribution to the terminated employee with the most hours'...

the drawback of having failsafe language is that you can only use the ratio % test to pass coverage, so a lot of documents do not include the language. and if you have it, you have to follow the terms of the document and use it.couldn't tell you where to look in your particular document, I think Corbel documents had it in section 4, but its been a long time and we don't use it in anything we presently have.

as for language of a corrective amendment, hmmm, something like the following:

Amendment to the XXXXX Plan

In order to satisfy the general non-discrimination test under 1.401(a)(4)-2© or the coverage test under 1.410(b)-2 for the Plan Year ended xx/yy/zz , and in accordance with the provisions of IRC 1.401(a)(4)-11(g) regarding corrective amendments, the Plan is hereby amended as follows:

For the Plan Year above only, an additional Allocation of % of Compensation or $ shall be provided to the following Participants:

Russel Cattle

D. Barbara Seville

Roland Butter

This amendment has been executed this _______________ day of _________________, 20___.

By______G. I. Luvmoney_____________

[TPA Bob]

Just so I understand. If I am providing the HCEs with a non elective contribution to max out their contributions at the 415 limit, and if I am only providing the NHCEs with the gateway minimum, and I do not pass any safe harbor tests under 401(a)(4), but I would pass if I added an employee who had not met eligibility for the Plan Year in question, I can amend the plan retroactively to bring this NHCE employee into the Plan to pass discrimination? As opposed to increasing the contribution to the NHCE group.

[thepensionmaven]

That's the question.

Just so I understand. If I am providing the HCEs with a non elective contribution to max out their contributions at the 415 limit, and if I am only providing the NHCEs with the gateway minimum, and I do not pass any safe harbor tests under 401(a)(4), but I would pass if I added an employee who had not met eligibility for the Plan Year in question, I can amend the plan retroactively to bring this NHCE employee into the Plan to pass discrimination? As opposed to increasing the contribution to the NHCE group.

[Kevin C]

That's the question.

Just so I understand. If I am providing the HCEs with a non elective contribution to max out their contributions at the 415 limit, and if I am only providing the NHCEs with the gateway minimum, and I do not pass any safe harbor tests under 401(a)(4), but I would pass if I added an employee who had not met eligibility for the Plan Year in question, I can amend the plan retroactively to bring this NHCE employee into the Plan to pass discrimination? As opposed to increasing the contribution to the NHCE group.

If you are failing the 401(a)(4) general test with the allocation you want, the answer may vary depending on what the document says. Does your document say the allocation must satisfy 401(a)(4)? From a long discussion of this last year, I gather most documents to not require satisfaction of 401(a)(4). The document we use does require it. An -11(g) amendment can not reduce benefits. The terms of the plan will determine what those protected benefits are.

[thepensionmaven]

No, just 410(b)

That's the question.

Just so I understand. If I am providing the HCEs with a non elective contribution to max out their contributions at the 415 limit, and if I am only providing the NHCEs with the gateway minimum, and I do not pass any safe harbor tests under 401(a)(4), but I would pass if I added an employee who had not met eligibility for the Plan Year in question, I can amend the plan retroactively to bring this NHCE employee into the Plan to pass discrimination? As opposed to increasing the contribution to the NHCE group.

If you are failing the 401(a)(4) general test with the allocation you want, the answer may vary depending on what the document says. Does your document say the allocation must satisfy 401(a)(4)? From a long discussion of this last year, I gather most documents to not require satisfaction of 401(a)(4). The document we use does require it. An -11(g) amendment can not reduce benefits. The terms of the plan will determine what those protected benefits are.

[TPA Bob]

If you are failing the 401(a)(4) general test with the allocation you want, the answer may vary depending on what the document says. Does your document say the allocation must satisfy 401(a)(4)? From a long discussion of this last year, I gather most documents to not require satisfaction of 401(a)(4). The document we use does require it. An -11(g) amendment can not reduce benefits. The terms of the plan will determine what those protected benefits are.

The document we are working with does not require satisfaction of 401(a)(4). So where does this leave me? Can I amend?

[Tom Poje]

hmmm. my original response was focused on if you fail coverage, how do you go about correcting. hence the asking about 'fail safe' language, because if you have that, then there is no need for a corrective amendment for the document requires you to bring enough people in to pass testing.

1.401(a)(4)-11(g)(3)(v) (A) - benefit must be provided to a nondiscriminatory group - you have to test the newly benefiting group separately example 4 in 1.401(a)(4)-2(b) actually increases the rate to HCEs to bring them up to NHCEs. that was a no-no because the plan was not a safe harbor formula, even though after the amendment the plan would satisfy 410(b) and 401(a)(4), because if you separately test the group benefiting it would only be HCEs.

absolutely fascinating - I would never have thought of increasing the HCEs. who makes up these examples!

1.401(a)(4)-11(g)(3)(v) (B) - basically ignore the extra step in (A) if the plan is being conformed to one of the safe harbors in 1.401(a)(4)-2(b) see example 1 of 1.401(a)(4)-11(g)(6)

ERSIA Outline Book describes it as follows: Any additional alloaction must be able to satisfy 401(a)(4) when tested separately (unless its conforming to a safe harbor) chapter 9 XII A 2

also 9 XII A 4 can a corrective amenment be used solely for satisfying the gateway?

yes, and once the plan satisfies the gateway, if it passes 401(a)(4) on a benefits basis, no further correction is needed. In addition, the group receiving the additional contributions would need to pass 401(a)(4) separately taking into account only their additional contributions. this shouldn't be a problem since the gateway is only required for NHCEs. a warning message is also carried that the amendment must have substance -just in case the people receving the additional contribution are terminated and 0% vested.

as someone commented above, I think you have to be careful to avoid 'reducing' someone's benefit (e.g. increase all other NHCEs instead of a corrective amendment) depending on the document language

[TPA Bob]

Which gets me back to the question of amendment. The Plan I am looking at now has two groups - HCEs and NHCEs. Discretionary contributions are allowed for each group and allocated within the group on a pro rata basis. Given this, I do not see when you can trigger a retroactive amendment to bring someone into the NHCE group.

I guess what I mean, if the employer says we will contribute maximum up to the 415 limit to the HCE group and the gateway minimum to the NHCE, and if the plan does not pass but would pass if I add one other employee to the NHCE group, am I ok to amend? Or do I have to add to the NHCE allocation or reduce the HCE allocation until it passes.

My reading of the reg - seems that the reason you do not pass is irrevelant. "......or may grant accruals or allocations to individuals who did not benefit under the plan during the plan year being corrected."

I would understand a corrective amendment if my contribution rate was fixed in the document but here it is discretionary.

[Tom Poje]

I'd hold it shouldn't matter whether the contribution is fixed or discretionary. (e.g. suppose you had a simple profit sharing plan that failed testing because terminees don't receive a contribution. If you couldn't correct because the contribution was dicretionary, then a lot of plans would end up being disqualified) with the problem is that these regs were written before crosstesting became such a big deal (though the rules pertaining to 401(k) corrective amendments were revised begining 1/1/06) As things currently stand, it is my 'undersatnding' that you can use a corrective amendment under the conditions specified in this question, but I ceratinly could be wrong about that - I'm basing things on what I have learned fro others. (I've never added anyone in a cross tested plan myself) I've tossed the question into the hopper for the Q and A session with the IRS for the ASPPA Conference in OCT, so perhaps they will provide a different answer then.

[TPA Bob]

Thanks Tom for your time on this.