How fix failed coverage test when 100% benefitting?

[Guest TaxedToDeath]

Controlled group consists of Company A and Company B. Company A sponsors Plan Y, a safe harbor matching 401(k) plan. Company B sponsors Plan Z, a safe harbor nonelective 401(k) plan.

Because Plans Y and Z utilize different safe harbor formulas, they cannot be aggregated for coverage and nondiscrimination testing. However, because the Plans are sponsored by members of a controlled group, the separate coverage and nondiscrimination testing for each Plan is performed by looking at the participants benefitting vs. the employer-wide workforce.

Company A has 12 employees (4 HCEs and 8 NHCEs), all of whom are participants in and benefit under Plan Y.

Company B has 88 employees (4 HCEs and 84 NHCEs), all of whom are participants in and benefit under Plan Z.

The combined workforce is therefore 8 HCEs and 92 NHCEs. The coverage ratio for Plan Y would therefore appear to be (8/92 NHCEs = 8.70%) divided by (4/8 HCEs = 50%) = 17.39%. FAIL.

Looking at the average benefits test, the NHCE concentration percentage is (92/100) = 92%. The safe harbor percentage is 26%, unsafe harbor percentage is 20%, and the midpoint is 23%.

The coverage ratio of 17.39% does not exceed the safe harbor percentage of 26%, and also does not exceed the unsafe harbor percentage of 20%. FAIL.

Since 100% of Company A's employees are participants in Plan Y and benefitting under Plan Y, there are no employees that might be added to Plan Y to help pass coverage. What, then, are the correction options under this scenario?

[Mike Preston]

Controlled group consists of Company A and Company B. Company A sponsors Plan Y, a safe harbor matching 401(k) plan. Company B sponsors Plan Z, a safe harbor nonelective 401(k) plan.

Because Plans Y and Z utilize different safe harbor formulas, they cannot be aggregated for coverage and nondiscrimination testing. However, because the Plans are sponsored by members of a controlled group, the separate coverage and nondiscrimination testing for each Plan is performed by looking at the participants benefitting vs. the employer-wide workforce.

Company A has 12 employees (4 HCEs and 8 NHCEs), all of whom are participants in and benefit under Plan Y.

Company B has 88 employees (4 HCEs and 84 NHCEs), all of whom are participants in and benefit under Plan Z.

The combined workforce is therefore 8 HCEs and 92 NHCEs. The coverage ratio for Plan Y would therefore appear to be (8/92 NHCEs = 8.70%) divided by (4/8 HCEs = 50%) = 17.39%. FAIL.

Looking at the average benefits test, the NHCE concentration percentage is (92/100) = 92%. The safe harbor percentage is 26%, unsafe harbor percentage is 20%, and the midpoint is 23%.

The coverage ratio of 17.39% does not exceed the safe harbor percentage of 26%, and also does not exceed the unsafe harbor percentage of 20%. FAIL.

Since 100% of Company A's employees are participants in Plan Y and benefitting under Plan Y, there are no employees that might be added to Plan Y to help pass coverage. What, then, are the correction options under this scenario?

Amend Plan Y so that enough workers in Company B participate in the match. Slap the person who designed Plan Y on the back of the head (if that is a favorite move of ex-UCLA quarterbacks, I wonder what SoCalActuary has to say?).