Safe Harbor Plan with Profit Sharing Coverage

[PFranckowiak]

Safe Harbot nonelective 3%

Nonintegrated Profit Sharing 1000 hour/ last day

Immediate eligibility

Hired a few people at the end of the year - less than 1000 hours and had a couple people quit. Therefore if running 410(b) on just the Profit Sharing portion, it fails 58%.

Plan document has the following in the PS section.

Code §410(b) fail-safe.

If b.2., 3., 5. and/or b.7., 8. or 9. is selected, the Code §410(b) ratio percentage fail-safe provisions will NOT apply (Plan Section 4.3(m)) unless selected below (leave blank if not applicable or fail-safe will not be used):

f. [X] The Plan will use the Code §410(b) fail-safe provisions and must satisfy the ratio percentage test of Code §410(b).

So am I correct in that I cannot use the Average Benefits Test to pass and would have to give some additional participants the profit sharing contribution?

Thanks

Pat

[Tom Poje]

that would be my understanding, if you have fail safe language you 'eliminate' the avg ben test (at least for coverage purposes)

[BG5150]

Doesn't the "PS" portion of the coverage test include ALL nonelective contributions, meaning Safe Harbor, too?

Unless you have an excluded class, you should have 100% coverage.

[BG5150]

that would be my understanding, if you have fail safe language you 'eliminate' the avg ben test (at least for coverage purposes)

This is from our document regarding the fail-safe corrections:

Notwithstanding the foregoing, the Plan Administrator always retains the option to meet the minimum coverage requirements of Code section 410(b) by using the average benefits test of Code section 410(b)(1)©.

And from another document:

Fail-Safe Allocation. Failure of the ratio percentage test of Code section 410(b)(1) or the average

benefits test of Code section 410(b)(2) requires correction using the principles set forth in this Section if

such use is elected in the Adoption Agreement.

So this seems to say you must use the Fail-Safe procedures only if your are failing both the ratio and ABT's. (And it seems you may use the Fail-Safes if you don't want to run the ABT

[Tom Poje]

I didn't look at the statement that said "If running the test on just the ps"
for coverage, you wouldn't do that because you look at all nonelective contributions

...
ERISA Outline Book has the following
Chapter 8 section V C6 last sentence
"If an employer wants the flexibility of testing the plan for compliance under the average benefits percentage test, in the event the plan fails the ratio test, it should not adopt such 'fail safe' language.

as I recall, this comes about as part of the definitely determinable rule. it is a trade off for the 'flexibility' of
instead of amending the plan within 9 1/2 months you get the chance to fix the plan any time, by bringing in people under a set of specific guidelines.

the language from FT William for this section is
If the application of the rules described above causes the Plan to fail to meet the minimum
coverage requirements of Code section 410(b)(1)(B) as of the last day of the Plan Year (the Plan does not benefit a percentage of Nonhighly Compensated Employees that is at least 70% of the percentage of Highly Compensated Employees who benefit under the Plan) for any Plan Year with respect to contributions described in this Section 4.03 because such contributions have not been allocated to a sufficient number or percentage of Participants for such year, then the list of Participants eligible to share in such contributions for such year shall be expanded to include the Participants described in the Adoption Agreement.

back in the early 90s (long long ago) when I did Pentabs support at Corbel, I remember asking one of the lawyers about this and a particular document that said it could be used for either avg ben test or ratio percentage test, and he indicated "Yes, that is what the Corbel document said, but the IRS made us change the language to be ratio % only.

the basic document copy I have from them (EGTRRA) has similar language to FT William
(m) 410(b) ratio percentage fail-safe provisions. Notwithstanding anything in this Section to the contrary, the provisions of this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b) ratio percentage fail-safe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year allocation condition or an Hours of Service (or months of service) allocation condition

basically saying, well, yes, maybe you could of passed by using the avg ben test, but if you said fail-safe and you fail ratio percentage test, you are "out of luck sucker"

[BG5150]

the language from FT William for this section is

If the application of the rules described above causes the Plan to fail to meet the minimum

coverage requirements of Code section 410(b)(1)(B) as of the last day of the Plan Year (the Plan does not benefit a percentage of Nonhighly Compensated Employees that is at least 70% of the percentage of Highly Compensated Employees who benefit under the Plan) for any Plan Year with respect to contributions described in this Section 4.03 because such contributions have not been allocated to a sufficient number or percentage of Participants for such year, then the list of Participants eligible to share in such contributions for such year shall be expanded to include the Participants described in the Adoption Agreement.

Tom, we use the FT William document, too, and I see the exact wording in Section 4.03(d) in the Basic Plan Document. There are sub-subsections (1) and (2) describing the correction. The very last sentence in the section says:

NOT WITHSTANDING THE FOREGOING, the Plan Administrator ALWAYS RETAINS THE OPTION to meet the minimum coverage requirements of Code Section 410(b) by using the AVERAGE BENEFITS TEST of Code section 410(b)(1)©.

(emphasis mine) That to me says you can use the ABT if you want.

If you look at the indentation of the paragraphs, the last sentence applies to sections (1) and (2) of 4.03(d).

[BG5150]

Also, from Datair's EGTRRA BPD:

2.3.8 Fail-Safe Allocation. Failure of the ratio percentage test of Code section 410(b)(1) OR the average
benefits test of Code section 410(b)(2) requires correction using the principles set forth in this Section if
such use is elected in the Adoption Agreement. Testing is done as of the last day of the Plan Year. With
respect only to non-standardized plans and notwithstanding any provision of the Plan or Adoption
Agreement to the contrary, if the Plan would otherwise fail to satisfy the requirements of Code section
410(b)(1) (the ratio percentage test) OR Code section 410(b)(2) (the average benefits test) and the
regulations thereunder because Employer contributions have not been allocated to a sufficient number or
percentage of Participants for the Plan Year, and the right to receive a contribution is conditioned upon
participation on the last day of the Plan Year or the completion of more than five hundred (500) Hours of
Service, or conditioned upon membership in a certain Employee classification, an additional contribution
shall be made by the Employer and shall be allocated to the Employer Accounts of affected Participants,
considering all the applicable exclusions of Code sections 410(b)(3) and (4) subject to the following
provisions:

Again, seems like you can use the ABT if you want.

[BG5150]

Furthermore, it does seem that if you fail both tests and you have fail-safe language in the doc, you must bring in people according to the formula until you pass the ratio test. No mention of the ABT otherwise.

[Mike Preston]

PF, just in case it isn't clear from the fact that BG and Poje are continuing this thread, you do NOT fail 410(b) for the "profit sharing" because as BG and Poje have already pointed out, when testing the plan for compliance under 410(b) you would count profit sharing and SH contributions together, which means your ratio percentage is 100%, not 58%.

[Tom Poje]

I can't say for sure what is the correct interpretation of how the fail safe is supposed to work.
After a bit of search, I did find the IRS comments (enclosed below)
in particular paragraph 1

1. A fail-safe provision cannot give the employer discretion in determining whether the provisions require additional allocations or accruals. In other words, an employer cannot have discretion over which test it will utilize to satisfy the nondiscrimination and/or coverage requirements. To satisfy this requirement, the test (e.g., the average benefit test for coverage or the general test for nondiscrimination) which will be used to satisfy coverage an/or nondiscrimination must be specified along with the methods or optional rules (e.g., cross-testing) which will be used in running the test. The test and any optional rules cannot be incorporated by reference. In addition, any definitions of terms necessary in running the test and the optional rules utilized for the test must be set forth.

so, does this paragraph mean
a. like cross testing, before you get to testing you must run and pass your minimum allocation gateway. so, because you want fail safe language, before you run your coverage you are required to specify how you will pass (e.g. using the ratio percentage test)
or
b. this kicks in only if you fail coverage using any and all means to pass testing.
in other words...

To satisfy this requirement, the test (e.g., the average benefit test for coverage or the general test for nondiscrimination) which will be used to satisfy coverage an/or nondiscrimination must be specified along with the methods or optional rules (e.g., cross-testing) which will be used in running the test in the event you failed coverage testing using all other means in the first place.

fail safe.pdf