Coverage for 401(k)--controlled group

[BG5150]

We have a 401(k) plan who's sponsor is part of a controlled group.  Company A sponsors the plan, and is the only one of the controlled group that does.

The pan has immediate entry for 401(k).  The plan is failing 410(b) coverage by the ratio test.  I do not believe the ABT is available as coverage uses the fail-safe provision.

What's my remedy?  Do I bring in one or more of the employees of the members other controlled group?  Companies that have not adopted the plan at all?

[duckthing]

Before you go too far, I would double-check the fail-safe language for coverage in the plan document. I believe some documents specify that the fail-safe only kicks in if you fail coverage, without further specifying what tests you may run to show that coverage passes.

[Kevin C]

You may want to take another look at the plan's fail-safe provision.  They typically only add back in people who are not benefiting due to an hours or last day requirement to receive the contribution.  It's also typical for it to say that if you still fail ratio percentage after adding everyone back in, the plan is free to use any other available method to pass 410(b).   

[BG5150]

Given that, seems like I can use the ABT for coverage because I cannot add anymore bodies.

And if the ABT fails?  QNEC until it passes?  To all NHCE?  Can I pick and choose?

[Tom Poje]

is it a new controlled group (such that you can use transition rule)

you said immediate entry - are you testing otherwise excludables separately)

[BG5150]

Became a CG in late '17.  Does the transition rule apply to new companies as well as mergers?

We did pass testing otherwise excludes.  But, baring any new-hires/attrition, we will be in a similar situation for '19 but with no excludables...

[Tom Poje]

I plead my usual ignorance

ERISA Outline book had (Chapter 8, Section VIII, Part E

 

2.Regulations expand application. The regulations define an "acquisition" or "disposition" for IRC §410(b)(6)(C) purposes to include any stock or asset acquisition, merger, or "other similar transaction" that involves a change in employer of the employees of a trade or business. See Treas. Reg. §1.410(b)-2(f). This definition permits use of this transition period where a corporation purchases the assets of another company and acquires the employees of that company. Following the purchase, there is still only one company, so a new "controlled group" member has not been added. Yet, the regulations permit use of the transition period under this type of transaction

 

5.Creation of new subsidiary probably not eligible for this transition rule if no acquisition from another company is involved. The transition relief granted by IRC §410(b)(6)(C) appears to contemplate some form of acquisition from an unrelated entity. The formation of a new subsidiary by a company, as part of a business restructuring, or acquisition involving entities that are already part of a related group, are probably not covered by the transition rule.

[Ilene Ferenczy]

Be careful in using the transition rule.  The transition rule permits you to bypass coverage testing if you are in the transition period, but it does not permit you to ignore the plan provisions.  So, if the plan includes everyone in the controlled group immediately, you cannot ignore that provision just because you are in the transition period.  However, if the plan covers only one employer and you would fail coverage during the transition period operating the plan according to its terms, you are saved by the transition rule.

In this case, you say that the acquisition happened in '17.  If you have a calendar year plan, the transition rule ended 12/31/18.  So, you would be okay through that date (assuming that the transition rule has not be eliminated through something like a plan amendment), but need to meet coverage normally for 2019.

 

Hope this helps ...

[Tom Poje]

 

so for 2019 you have lots of choices.

good luck!

 

 

[Roycal]

One would need much more info to solve the problem, of course, but there are many ways to approach this.  You can look for the least expensive solution, or a solution that would make more sense from the employer's (controlled group's) compensation goals (assuming it is just not to feather the nest of the HCEs while giving most everyone else as little as possible, i.e., a shelter plan).  To do the job right, you need to engage the sponsor's or controlled group's ERISA attorney (or other highly qualified expert).