Plan Document Excludes Key - Plan Fails

[Vlad401k]

I'm running testing right now for one of our plans and it specifically states in the document that it excludes key employees from participation (there are 3 key employees). However, because we're excluding these employees from testing, the ADP test is failing. If they were included in testing, the ADP test would pass because there would be 3 extra participants with 0% ADR which would lower the HCE ADP. Question: can the document be amended retroactively (for 2014 plan year) to not exclude the key employees?

[Buffys Redrum]

Maybe I'm confused. Keys were excluded from participation. Amazingly - Keys deferred 0% (since they didn't participate), and now it seems like a good idea to have them added to the plan. Instinctively - I would say it's too late for 2014.

[Kevin C]

No, you can not do a corrective amendment to retroactively include the Key Employees.

1.401(a)(4)-11(g)(3)(v)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.

Even if you could, they would not be included in the ADP test with zero deferrals. After the amendment, they would retroactively be improperly excluded from participation, which would need to be corrected under EPCRS. So, they would not help your ADP test even if you could amend to retroactively add them.

[Vlad401k]

Buffys Redrum,

Yes, that's exactly the situation. Key employees did not defer anything and with them included in the ADP test, it would pass.

Kevin,

Thanks for providing that section. However, it is my understanding that the part you highlighted does not really relate to the issue at hand. There are no "additional allocations or accruals" to be tested, as there were none made to the key employees.

The way I look at it is that it's not a material modification, so I don't see why it can't be made retroactively. Am I missing something?

[Mike Preston]

Certainly not a fanciful imagination. I have never heard of the "not a material modification" standard.

[Buffys Redrum]

The Keys had to have had the ability to elect to contribute, or not contribute, in 2014.

It's reasonable to think the reason Keys were excluded in the plan document was because they did participate and the Non-Key HCEs got tired of the Keys making the test results worse.

Including the Keys for testing, but not allowing them to participate, seems prohibited.

[Vlad401k]

Buffys,

Actually, the keys never contributed to the plan since it was set up. What you're saying does make sense though. Since they were never given the chance to participate, it's too late now to amend the document and include them in the 2014 ADP test.

[Kevin C]

You missed part of the highlighted text. "...and must benefit a group of employees that separately satisfies section 410(b)" You are wanting to do a corrective amendment to add a group of Key Employees to the plan. I don't see how that can possibly satisfy 410(b) separately, since the Keys will almost certainly be all HCEs.

You also missed my note that the amendment you want to do would result in the Keys being improperly excluded from the plan for 2014, since they were not allowed to defer during 2014. If you don't correct that, you have disqualified the plan. The EPCRS correction sets the missed deferral rate for improperly excluded HCE's as the average deferral rate for the included HCEs in the plan. In other words, the correction does not change your ADP test results. You do not get to include them in the testing as zeroes. If the plan has a match, they would also get the match based on the missed deferral rate.