Correcting 410(b) failure in controlled group

[Floridaattorney]

Client owns 100% of two separate corps. Each has its own 401k. One (Plan B) is safe harbor match. The other (Plan A) is non safe harbor match. Plans have been separately administered for years and years. Client never told either tpa about the other until this year. So, testing on a control group basis was not performed until this year.

One plan (plan A) passes 410b ratio percentage test. The other (Plan B) does not. Plan B also fails the non discriminatory portion of the average benefit test. So, 410b coverage test is not passed.

Plan B is much smaller. Document is silent on correction method. However, it appears at first impression that the appropriate correction method for prior years would be to add Nhce employees from company A to Plan B so that Plan B can pass either the ratio or abp test.

That said, this will require many employees of A to be added to Plan B. And, many of the employees of A who would be added to Plan B are employees who have participated in Plan A and, received matching contributions from A.

Is this the appropriate correction method?

Is there another one?

If this is the appropriate correction method, what criteria should be used to select the A employees who would be retroactively included in the A plan. What level of benefit should they receive? Should there be a ' set off' for what they have already received from plan A

Any other comments are also welcome.

Thank you.

[ETA Consulting LLC]

Well, you're looking at two distinct issues:

1) In the year the plan failed the non-discrimination test (e.g. 410(b)), you had a certain amount of time to fix it after the plan year ended (12 months). When you failed to meet that standard you failed to continue to qualify; which introduces VCP.

Now that you've established the need for VCP for the past failures that have gone unnoticed and uncorrected; you get into the endless methods you may employ during any particular year in order to get the tests to pass. The document would, typically, not say how to correct a 410(b) failure, but would merely state that you must pass 410(b). That failure is your issue.

2) It's math from here. What additional contributions could have been made by the employer to get the plan to pass the average benefits test? What employees could've been added to a plan in order to get them to pass? When type of prospective design may be done to ensure the same violation doesn't continue to occur year after year in the future (expecially that we are now at the end of 2013)?

I am assuming from your OP that you're mainly attempting answer the questions in item 2? The solution, here, doesn't always present as a one-size fits all. In attempting to resolve, you may come up with some type of component plan testing that you've never considered that result in a passing test. My point is that it becomes a 'trial and error' process as opposed to 'here's what you do'.

I know it doesn't directly answer your question, but wanted to ensure we're on the same page as to what this true issues are.

Good Luck!

[Floridaattorney]

Thanks for your helpful comments.