Fail Safe language for coverage purposes

[cpc0506]

Plan has 3 employees – one of which is an HCE, two NHCE. All are participants in the plan.

One of the two NHCEs (NHCE A) only worked 499 hours in 2014 but was employed as of 12/31/14. Plan has 1000 hours and last day requirement for Profit Sharing allocation. Plan fails coverage when I exclude this employee, coverage % is now only 50%. Adoption Agreement includes fail safe language. So I need to bring the employee in to pass coverage.

Here is the dilemma. With only 2 NHCEs I can only have 1 rate group (Relius EGTRRA document. The one NHCE (NHCE B) received a 28% Profit Sharing contribution and a 3% SHNEC.

TPA has given NHCE A a 2% PS allocation and a 3% SHNEC allocation to satisfy gateway. I don’t feel that this is ok. Since you are forced to bring in NHCE A to pass coverage, I think he has to get the same allocation so he is in the same rate group. Giving a 2% allocation puts this employee into another rate group which is not allowed.

Am I overthinking this? Can a corrective amendment be made to remove the fail safe language after the plan year has ended? (I don't believe so.) Any guidance would be greatly appreciated.

[K2retire]

There cannot be allocation conditions on the SHNE so you should always have 100% coverage on the nonelective contributions.

Since there are allocation conditions on the PS and one of your participants does not meet them, that person is not eligible for a PS contribution. You have not indicated if the allocation is cross tested, but the TPA saying the person must get a gateway contribution implies that it is. In that case, because the person received an employer contribution, they must receive at least the gateway percentage. Absent the required hours of service, however, they are not entitled to anything more than the required safe harbor and gateway contributions.

[cpc0506]

OK. So you are considering the SHNEC contribution in your coverage test for Profit Sharing allocation. I guess my issue is: 1) there are two separate provisions in the Adoption Agreement covering SHNE and profit sharing. We have always included the SH contribution in our deferral coverage test since the provisions are identical, which you are saying is incorrect. Can you provide some written guidelines for this? 2) Our Master Plan Document indicates that an employee only getting the 3% Top Heavy is NOT considered benefiting under the profit sharing coverage test. How is this situation any different? 3) Now, if it turns out that he is in the coverage test and the coverage test passes, how can I allocate to this employee only 5% if the plan only allows for 1 rate group and that group is getting 31%?

[My 2 cents]

OK. So you are considering the SHNEC contribution in your coverage test for Profit Sharing allocation. I guess my issue is: 1) there are two separate provisions in the Adoption Agreement covering SHNE and profit sharing. We have always included the SH contribution in our deferral coverage test since the provisions are identical, which you are saying is incorrect. Can you provide some written guidelines for this? 2) Our Master Plan Document indicates that an employee only getting the 3% Top Heavy is NOT considered benefiting under the profit sharing coverage test. How is this situation any different? 3) Now, if it turns out that he is in the coverage test and the coverage test passes, how can I allocate to this employee only 5% if the plan only allows for 1 rate group and that group is getting 31%?

Last time I looked, you only have rate groups based on HCEs. The tests are all structured in terms of one rate group for each HCE, and see how many non-HCEs fit in each HCE's rate group. You do not have separate rate groups for NHCEs receiving different amounts. Or have they changed the rules?

[Tom Poje]

in regards to top heavy, 1.401(a)(4)-2(b)(4)(vi)(D)(3)
(if I read the number correctly) is where it indicates, for a 'safe harbor formula'[note: not a safe harbor 401k plan but rather a profit sharing formula that does not have to be tested]
if the plan has 2 formulas, one group gets a contribution and the other group gets top heavy, the plan is still deemed to be a 'safe harbor formula' and thus no nondiscrim testing if the plan will pass 410(b) by treating the top heavy people as not benefiting. if you fail 410b, then you have to nondiscrim testing because you no longer have a safe harbor formula, instead you have a cross tested formula, 1 group at x% and another group a 3%. Or another way of looking at it, if the top heavy was not required and you would pass testing treating these people as 0 you do not have to test - which would make sense.

The plan you have is cross tested anyway.


I suppose safe harbor regs in regards to the SHNEC 1.401(k)-3(h)(2) these contributions ....are subject to the rules generally applicable to nonelective contributions under section 401(a)(4)

[cpc0506]

The maximum number of NHCE allocation rates is determined in accordance with the following table:

Number of Eligible NHCEs

Maximum Allocation Rates

2 or less 1

3-8 2

9-11 3

12-19 4

20-29 5

30 or more 6 or more but not more than 25

This is the language from the Basic Plan Document. There is only one allocation rate allowed for the NHCE when there are only 2 NHCEs.

[chc93]

Like Tom says... what about looking at it this way. HCE gets x%. NHCE-A gets 31%. NHCE-B gets 3% top heavy only. Coverage ratio is 100% (all NHCE's benefit). But then this is not a uniform allocation, so have to cross-test. Then NHCE-B gets additional 2% for gateway. If cross-test passes... all is good. You still have 1 NHCE "group"... NHCE-A only. NHCE-B doesn't get anything other that statutory minimums, and so I don't think this would be another NHCE "group".

[Mike Preston]

As others have pointed out, any language you are relying on to indicate some sort of corrective action is required to pass coverage is irrelevant since with the 3% SHNEC, you pass coverage as far as employer contributions go.

As others have also pointed out, you are confusing the term you should be using ("allocation rate") with another term ("rate group"). Unfortunately for you, the term "rate group" has a specific meaning when discussing how testing works and that specific meaning has nothing to do with what you are trying to discuss. So, the simple solution to help clarify things is to simply stop using the term "rate group" when you should be using the term "allocation rate".

So, besides a tongue-lashing for using the wrong terminology and another tongue-lashing, IMO, for saddling a client with a prototype document which arbitrarily limits the number of allocation rates available for no good reason other than the firm designing the plan cares not one whit about what is best for the client (strong message to follow), let's assume that after passing coverage you find that you fail 401(a)(4). [bTW, with NHCE B receiving a total ER contribution of 31% of pay I find it hard to believe you would fail 401(a)(4) based on the census you have shared, but I will assume you do just to round out the discussion.] You then must dig into the structure of the document to see whether the language allows a special gateway allocation in addition (or as an override) to the excruciatingly limiting language regarding allocation rates.

If it does, you have one allocation rate notwithstanding the disparate monetary allocations. If it doesn't, your view prevails.

To reiterate, all of this, of course, is a result of 401(a)(4) testing, not 410(b) (coverage) testing. Your document, in addition to the coverage safe-harbor language, might also have 401(a)(4) safe-harbor language. If it does, you must follow it.

[austin3515]

So, besides a tongue-lashing for using the wrong terminology and another tongue-lashing, IMO, for saddling a client with a prototype document which arbitrarily limits the number of allocation rates available for no good reason other than the firm designing the plan cares not one whit about what is best for the client (strong message to follow)

I think that 98% of the TPA's who signed up for the EGTRRA PT did so without knowing the distinction. We signed in for the PT years before there was ever any training. I personally blame our document provider for not making a bigger deal about this. Once we all knew about this important distinction, I think PT's pretty much dropped off the landscape, at least in the unbundled TPA world.

[Mike Preston]

PT?

[austin3515]

Prototype.