correct ADP before 401b?

[AlbanyConsultant]

I have a plan that is going to fail the ADP Test this year. The plan will also fail coverage on the deferrals because they are controlled group and the other company didn't adopt the plan (this other co., "B", is larger than the original company, "A", so we have a lot of people who weren't given the opportunity to defer).

Which order do I have to correct things? Can I run the ADP Test just on A and process the refunds and then deal with the coverage failure separately? Or do I have to figure out how to fix coverage and then include those new "participants" in the test (which will make the ADP Test results far worse, of course)?

Thanks.

[Belgarath]

Caveat - I have done no research on this whatsoever. But I seem to have a faint memory of a correction under Revenue Procedure 2013-12, and I think it may have been Appendix A under improper exclusion of eligible employees. My hazy recollection is that the ADP failure must first be corrected with regard to those employees who were actually provided the opportunity to defer.

Then you'd have to deal with coverage issues, and the appropriate correction for excluding employees. But again, this is very much off the cuff, so don't trust this opinion! I'm sure you'll get some better answers.

Another question - any possibility that the 401(b)(6)© exclusion applies for the plan year in question, so that you don't fail coverage? Probably not - that would be too convenient!

[Tom Poje]

you didn't say how much you fail the ADP test, and the regs don't say how much to provide someone in order to be considered 'benefiting' and pass coverage

if you take the NHCE avg from the ADP test, then the ADP test is going to stay the same

if you provide more then the ADP test would improve.

[AlbanyConsultant]

Just got the data yesterday and did a quick scan - the problem is that we took over the plan for 2013 admin in mid-2014, and we found that A had their first person cross the comp limit in 2013... but she had already deferred almost the max in 2014. So I don't know how badly we fail the ADP test yet, only that we're going to because the only HCE is deferring at something like 14%.

A and B have been a controlled group for a while (i.e., since before we took it over), but since there were no HCEs in either company, it didn't impact the 2013 admin.

I don't see a mechanism for deciding how much to give these new HCEs other than half of the NHCE ADP rate. Which is going to get really, really expensive if they have to give several percent to a hundred or more NHCEs from Company B (last year, the NHCE rate was almost 5%).

Belgarath, I presume you're referring to EPCRS Appendix A, Section .05(2)g, which says:

(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded.

I'll link to it, too. http://www.irs.gov/irb/2013-04_IRB/ar06.html#d0e2716

[Tom Poje]

I assume you mean it has been a controlled group before 2013.

the whole purpose of the transition rules is to give a chance for fixing things before they happen.

so, while I sympathize with the situation, I'm not sure one can say 'there was never time to fix it', since the transition rules span 2 plan years. I realize things gets missed, and it would be nice if their was an easier fix.

good luck!

[BG5150]

Was ER B ever mandated to join the plan?

[jpod]

Albany, I am sure you realize this but just because there is a controlled group and the other employer is much larger doesn't necessarily mean you have a coverage problem. If you had said, simply, we have a coverage problem i wouldn't be commenting.

[AlbanyConsultant]

I assume you mean it has been a controlled group before 2013.

the whole purpose of the transition rules is to give a chance for fixing things before they happen.

so, while I sympathize with the situation, I'm not sure one can say 'there was never time to fix it', since the transition rules span 2 plan years. I realize things gets missed, and it would be nice if their was an easier fix.

good luck!

Yes, they've been a CG for years (according to them and their accountants, at least), but there was never a problem because there were no HCEs benefitting in the 401(k) plan because no one was paid that much until 2013. There really wasn't an opportunity to fix this in time.

Was ER B ever mandated to join the plan?

Albany, I am sure you realize this but just because there is a controlled group and the other employer is much larger doesn't necessarily mean you have a coverage problem. If you had said, simply, we have a coverage problem i wouldn't be commenting.

I was simplifying the facts because I was trying to solve one problem at a time. Here's the full scoop so you can see how bad this is (I posted about it before at some point):

Three NFPs (call them X, Y, and Z) are in a controlled group. X (20 participants) and Y (50 participants) each sponsor their own 401(k) plan where they are the only adopting employer. X has an HCE for the first time in 2014; Y has no HCEs. Z is a 520 participant PS only plan with 1 HCE (it also has its own 403(b) plan - no, I don't know why the prior TPA was smart enough to make this one a 403(b) and not the others).

410(b) is fine on the PS side because I have 519/588 NHCEs benefitting (which is over 70% even before I get to only 1/2 HCEs benefit). Ditto for the 403(b).

401(b) on the 401(k) side is the problem. Benefitting HCEs are 1/2, and benefitting NHCEs are 69/588, which fails by a lot. I haven't actually done the average benefits test, but I suspect that it will also fail since I have 519 zeros to average in. Correcting this will be... I don't even know. "Expensive" springs to mind.

And on top of that, my one benefitting HCE in X's 401(k) deferred 12% (I misspoke above because I was using an estimated comp number). The average NHCE ADP in X's plan last year was about 5%, so there's an ADP failure issue, too. I figure that's my top priority, because that has to be refunded in 15 days.

So I've got a bunch of issues to deal with, and am trying to develop a strategy for it. I'm trying to figure out if I can treat each 401(k) plan separately or if I have to put them together. And I'm desperately looking for a solution to the coverage problem that doesn't involve bringing in 137 NHCEs from Z and giving them an employer contribution of half the ADP deferral rate for missed deferral opportunity.

For 2015, I've terminated all these plans and have started up one new ERISA 403(b) with employer contributions for all three entities, but I've got to get past 2014 first! So I'll take any advice anyone has.

[austin3515]

If I can simplify your problem; X fails coverage because although Zs employees are covered by a 403b plan, they are not excludable for coverage purposes by virtue of that participation (even though the opposite is true with respect to the 403b plan).

Just to make sure you know, universal availabiliy is applied employer by employer - there is no controlled group aggregation. I was stunned to learn this a few months back.

But I agree you're up a creek w/o a paddle. I would submit to the IRS and say it would be ridiculous to put us do-gooders out of business over something so stupid, especially since every darn employee had the same opportunity to participate.

Maybe do an anonymous...

[AlbanyConsultant]

I thought that I found an out with this article from Prudential, but it seems that if they are both NFPs then I don't get to use this exemption.

However... I did find a paddle. Writing the previous post made me challenge the CG assumption, and it turns out they were basing it on an evaluation done over five years ago - no one had looked at it since then! It turns out that there is practically no board overlap between Z and X/Y, so I think this problem has just disappeared. X and Y have more board member overlap, but it might not reach the 80% threshold - either way, them being a CG wouldn't be a problem.