401(a)(26) Correction

[JBones]

A CB/PS combo plan that uses a carveout is not passing 401(a)(26) due to a number of terminations during the year (all above 500 hours). I am preparing a corrective amendment adding 3 particpants for the plan year to bring DB participation up to 40% of nonexcludables. The 3 participants that the sponsor wants to include are all HCE's. After the amendment, the plan will pass 401(a)(26), 410(b) and 401(a)(26), but I am just leary about benefitting HCE's only in the corrective. Is this allowed?

[PensionPro]

The corrective amendment can not be discriminatory. From §1.401(a)(4)-11(g):

Corrective amendment for coverage or amounts testing--(A) Retroactive benefits must be provided to nondiscriminatory group. Except as provided in paragraph (g)(3)(v)(B) of this section, if the corrective amendment is adopted after the close of the plan year, the additional allocations or accruals for the preceding year resulting from the corrective amendment must separately satisfy section 401(a)(4) for the preceding plan year and must benefit a group of employees that separately satisfies section 410(b)(determined by applying the same rules as are applied in determining whether a component plan separately satisfies section 410(b) under §1.401(a)(4)-9©(4)). Thus, for example, in applying the rules of this paragraph (g)(3)(v), an employer may not aggregate the additional accruals or allocations for the preceding plan year resulting from the corrective amendment with the other accruals or allocations already provided under the terms of the plan as in effect during the preceding plan year without regard to the corrective amendment.

[JBones]

The corrective amendment can not be discriminatory. From §1.401(a)(4)-11(g):

Corrective amendment for coverage or amounts testing--(A) Retroactive benefits must be provided to nondiscriminatory group. Except as provided in paragraph (g)(3)(v)(B) of this section, if the corrective amendment is adopted after the close of the plan year, the additional allocations or accruals for the preceding year resulting from the corrective amendment must separately satisfy section 401(a)(4) for the preceding plan year and must benefit a group of employees that separately satisfies section 410(b)(determined by applying the same rules as are applied in determining whether a component plan separately satisfies section 410(b) under §1.401(a)(4)-9©(4)). Thus, for example, in applying the rules of this paragraph (g)(3)(v), an employer may not aggregate the additional accruals or allocations for the preceding plan year resulting from the corrective amendment with the other accruals or allocations already provided under the terms of the plan as in effect during the preceding plan year without regard to the corrective amendment.

Thanks. I thought that would be the case.

Just to play devil's advocate, what if the reason that the plan didn't pass 401(a)(26) is because a group was excluded, but that entire group consisted of HCE's and the only way to pass would be to add HCE's to the plan?

[ETA Consulting LLC]

It is not possible to discriminate when all employees are HCEs; or all employees are NHCEs. The only way discrimination would be possible it you brought in ALL HCEs when it would have been possible to bring in NHCEs as well.

Please note: I am not defining "discrimination" but merely speaking to the facts you are presenting. If your only option was to bring in HCEs, because their were no NHCEs, then it's impossible that would be discriminatory under 401(a)(4).

[JBones]

It is not possible to discriminate when all employees are HCEs; or all employees are NHCEs. The only way discrimination would be possible it you brought in ALL HCEs when it would have been possible to bring in NHCEs as well.

Please note: I am not defining "discrimination" but merely speaking to the facts you are presenting. If your only option was to bring in HCEs, because their were no NHCEs, then it's impossible that would be discriminatory under 401(a)(4).

Makes sense to me. Thanks.

[AndyH]

I don't think I agree.

Why would it not be discriminatory to benefit an HCE through a corrective amendment when an NHCE could have benefitted?

I would think such a correction would be subject to testing and if the plan was a safe harbor it would render it not a safe harbor for the year in question.

Providing such a correction only to NHCEs automatically avoids this issue because a lower benefit level provided to an HCE is disregarded for safe harbor status.

If there are NHCEs involved, I do think it would be an issue to provide something additonal to HCEs only unless you general test it including the correction.

[ETA Consulting LLC]

I don't think I agree.

Why would it not be discriminatory to benefit an HCE through a corrective amendment when an NHCE could have benefitted?

You do agree, you just mis-read what we were saying.

We were saying that there are no NHCEs. If there aren't any, then how could one have benefited?

[AndyH]

Ok, maybe I misread the question, but I don't think JBones said that.

"The 3 participants that the sponsor wants to include are all HCE's"

The above Shirley gives me the impression that there are NHCEs.

If there are no NHCEs eligible for the plan, as Emily Litella used to say, "Never mind".

[Effen]

"Emily Litella" - Wow, showing your age today...

Awfully quite in Red Sox nation today...

[AndyH]

The September pain is gone. Feels good. Now the pain shifts to the team ownership.

[PensionPro]

The hypothetical question in post # 3 was I think:

If a DB plan covering all its non-excludible NHCEs and some of its non-excludible HCEs fails 401a26, is a corrective amendment benefitting only HCEs discriminatory?