Correcting Coverage Testing, Can we distribute small accounts?

[ERISA-Bubs]

We recently corrected for coverage testing failure by making QNECs to the plan (401(k)).  Many of the QNECs went to people who otherwise had no account balance, so their accounts are now very small.  Our plan administrator suggested we erase these accounts pursuant to this section of EPCRS:

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a participant with an account under the plan.

This doesn't really make sense to me, since the correction involves making corrective contributions (QNECs) and the above is for corrective distributions.  

That said, our plan has a $75 fee for distributions.  So for people with less than $75 in the plan, they won't be able to get their money out anyway, since the entirety will be used to pay the distribution fee.

What are our options?  Should we inform these people that they have an account balance but will never see the money?  Should we just erase the accounts worth $75 or less?  Is that an appropriate way to correct coverage testing failures?  How should are decisions be affected by those who are still employed versus those who are not?  

 

[Tom Poje]

I suppose it depends on what one feels what is the intent of the regulations.

1.401(a)(4)-11(g)(4) says corrective amendment must have substance...can't be taken into account to the extent it applies to nonvested employees who terminated on or before close of the preceding year, and who therefore would receive no economic benefit

so, it is a QNEC so that technically doesn't apply if you take a strict reading of this reg. (?)

but what is the intent of the reg? we know ahead of time when the QNEC is made there are distribution fees, and so ultimately such people would receive no economic benefit.  that doesn't seem to be the intent of the reg you can use someone to help pass the test and then the person gets nothing (granted one has no control over distribution fee, and for all practical purposes  the company has thus 'made' a contribution to the investment house rather than the participant) but that is the end result. if the regs were written to cover every possibility that may arise they would go on and on...oh wait, they already do.

at least to me it would seem more logical if it were possible the company paid the distribution fees in such situations, but I don't think there are any guidelines when stuff like this happens.

 

[Bird]

I think EPCRS is the wrong place to look.  You made QNECs to correct a testing failure.  Those accounts now exist and are subject to all plan terms and conditions.  If these participants are otherwise entitled to a distribution*, and the fee eats up their money, so be it - pay them out at a net $0 and move on.

*Maybe I'm reading too much into it but you may not just get rid of accounts for active participants because they are small accounts.

[Pam Shoup]

6 hours ago, Bird said:

*Maybe I'm reading too much into it but you may not just get rid of accounts for active participants because they are small accounts.

I agree with Bird.  If they are eligible participants with account balances, you can't do anything about it.  Maybe it is a good time to approach them about making deferrals into the plan?

If they are terminated, then you can process the way you normally process small balance terminees.

[Luke Bailey]

By definition as a QNEC the amounts are not distributable until death, disability, or separation from service.

[ESOP Guy]

If you are talking about actives what happens if you wipe out their account and they start to defer later on?  Their balance could go over $75 and you just took a benefit from them they would have had. 

[David Schultz]

Just to highlight: Tom's recommendation is to use an -11(g) amendment, which falls outside of EPCRS.  For the reason that the ESOP Guy highlighted I think Tom is talking a bit of a conservative stance in taking the position that the small QNECs have no "substance" under the -11(g) rules since the benefit will be consumed by the fee - the participant can always choose to make contributions and consequently receive a benefit.  But Tom's position isn't unreasonable.  It isn't black and white. 

That said, this is not an EPCRS correction and the Delivery of Small Benefits provision does not apply.  In any event, that provision is only applicable to the extent that the participant has a distributable event.  If there is no distributable event under the terms of the plan, the money stays in the plan.  Maybe over time investment returns will increase the value.