coverage problem

[Earl]

403b Plan with immediate eligibility excludes certain classes of employees.

1. Plan fails Ratio Percentage for coverage.

Plan document does not specify how to correct coverage failure.

Adding one person would pass Ratio Percentage.

Can I add 1 person?

Do I have to add 1 class?

If I can add 1 person, do I have free range who to pick?

Should I use "most hours"?

Can I use "lowest compensation"?

Any thoughts on this?

2. Plan does not specify how to pass coverage, not in Document, not in AAgreement. Can I use either Ratio Percentage or Average Benefits Test?

Thank you!

[rcline46]

First, as a 403(b) there is universal eligibility, so failing coverage is (almost) impossible. What classes of people are excluded?

Once we are sure the 'exclusions' are good, then we can go to the failure problem.

[Earl]

The coverage problem is with the Match. Exclusions are Coaches & teachers who teach only one class.

The excluded people are deferral eligible.

[Flyboyjohn]

In the absence of a fail-safe coverage failure correction in the document wouldn't this be the classic case for an -11(g) retroactive amendment?

[Carol V. Calhoun]

I don't have a specific citation, but I know IRS officials have in the past been very negative about adding a single employee, as opposed to a class of employees, to satisfy coverage problems. The fear is that you add the lowest paid employee, then make the maximum contribution on behalf of that employee, and you've satisfied your tests at minimal expense, without actually giving meaningful benefits to lower paid employees. Allowing the inclusion of specific employees, as opposed to a class of employees, would also raise the concern that the employer could be quietly imposing, for example, age and service conditions in excess of those permitted, by picking and choosing specific employees to cover. If this is the case even in normal 410(b) testing, it's unlikely the IRS would accept it as a correction method.

[BG5150]

The problem with doing an 11-g amendment, is that it is supposed to be a 1-off deal. Part of the conditions of such an amendment is:

(A) The corrective amendment is not part of a pattern of amendments being used to correct repeated failures with respect to a particular benefit, right, or feature;

401(a)(4)11-(g)(3)(vi)(A)

You may be having this problem year after year, so it is contrary to the regulation to do something like this every year.

[rcline46]

Ok, 403(b) that excludes Coaches and teachers who only teach 1 class. The ratio test is 70%, so that means all HCES get a match, but less than 70% of the NCEs are eligible for a match. To me that means that more than 30% of the staff are either Coaches or 1 class teachers. This seems like a high proportion of the staff.

You also said there was no correction language in the document, so you are on your own. As BG said, doing an -11(g) amendment each year is not good. I might suggest a new class to be included - such as coaches with over 15 years or something like that.