Elimination of 410(b) Fail Safe

[KJohnson]

Any thoughts on the elimination of a 410(b) fail safe provision mid-year? TAM 9735001 basically states you can't change allocations for anyone who has already satisfied the allocation conditions of the Plan for the year. But with the add back you are suspending your allocation conditions--so you don't know, who, if anyone, will have to be added back. It would seem that for the first typical add back--participants who are employed on the last day of the plan year but don't have the requisite hours of service--it would not be a problem since they haven't yet satisfied the last day requirement. But what about from there? Is this an issue? If so, any other issues other than TAM 9735001

[ETA Consulting LLC]

I wouldn't take it to that level. The fail safe would apply only after an allocation is made and the test has failed. It, then, brings individuals into the fold in order to prevent cross-testing or other advanced testing while remaining on a straight coverage ratio test. I cannot see where an elimination of this provision during the year would constitute changing the conditions to receive an allocation after those conditions have been met. I think that is a stretch since, by definition, the fail-safe cannot be applied until the end of the year after all others (who accrued a right under the plan's accrual requirements) have received an allocation; and then that allocation has failed. Until that happens, you'd accrue a right to nothing. I see the argument (to the contrary), but just find it too much of a stretch.

Good Luck!

[K2retire]

Not relevant to your question, but I've been trying to figure out why anyone would want to remove a fail safe provision. What are you trying to accomplish or prevent?

[rcline46]

We do not put the fail-safe provision in ANY plan. We want the flexibility to use any correction method.

[ETA Consulting LLC]

Not relevant to your question, but I've been trying to figure out why anyone would want to remove a fail safe provision. What are you trying to accomplish or prevent?

The plan may actually pass non-discrimination under 410(b) using testing methods more advanced and the coverage ratio test. The fail safe provision would preclude the use of more advanced testing and begin to bring additional employees in pursuant to a predetermined order. I think rcline46's point is more consistent with industry practice that you'd have the flexibility to perform additional tests and then draft an 11-g amendment to correct; which could potentially result in thousands of dollars in savings.

Good question. It's always good to know various angles.

Good Luck!