"I was told it would be fine." Excluded Division

[Mr Bagwell]

Detail: New plan to us in 2015. Plan has been in existence for decades. Safe Harbor 3% with Cross tested design. The employer was "told" that the division he purchased in 2006 could be excluded and everything would be fine. The excluded division was discussed in some manner at the sales process. I was not there, I don't know all the details. I got the privilege to try to sort out mess. Employer would like to keep division excluded if possible. (It's not)

Well fast forward to 2016 and 2015 testing. I have all the census information and sure enough, it won't pass 410b coverage. The excluded division is killing the numbers.

Hide sight would have been to not bring the whole division, but to have them meet eligibility and treat like any other division; knowing that coverage was going to be an issue and several of the employees would never be eligible.

I need some direction.

Thanks!

[Tom Poje]

Q and A 39 at the 2012 ASPPA Conference:
Question

A safe harbor 401(k) plan fails the §410(b) coverage with respect to its profit sharing plan component. Within 9-1/2 months after the close of the plan year, the employer adopts a corrective amendment, pursuant to Treas. Reg. §1.401(a)(4)-11(g). Does this amendment cause the 401(k) component to lose its safe harbor for the plan

year in which the corrective amendment is adopted?

Proposed Answer

No. Regardless of the position taken by the IRS with respect to amendments made to a safe harbor 401(k) plan, an implied exception exists for any amendments that are necessary to correct a violation of the nondiscrimination testing rules, which is a fundamental requirement for a qualified plan.
The IRS agrees with the proposed answer.

of course your situation is different in that the deferral coverage fails, not the profit sharing, I would suspect you have to provide some type of a QNEC to pass coverage and the 3% safe harbor to those folks, but how you go about deciding who to bring in.... I guess as you say, treat like any other division for eligibility

[Mr Bagwell]

Thanks Tom.

I will have more questions and thoughts....

[david rigby]

Seems like you may have multiple plan years of concern (since 2008?). It would be prudent for sponsor to consider getting advice from ERISA counsel.

[Mike Preston]

Have you had an expert run the Average Benefits Test? Based solely on what you say I, for one, am not comfortable relying on your statement that the plan fails coverage.

[Mr Bagwell]

That's fair, Mike.