Leased Employees - Problems with 410(b)

[Y401k]

We recently took over  CB/DC plans and discovered that they have a large number of leased employees.  In looking at the history of these leased employees - they work substantially full-time and have been there over a year.  The plans currently exclude leased employees - but as we all know they need to be counted in our coverage testing.  The DC document has fail safe language - so question number one - are we then precluded from performing the Average Benefits Test to satisfy 410(b) - my initial thought is yes (however I'm not sure how it works with the CB plan also failing).  Does the corrective measure then mean we need to begin to bring in the leased employees based on the fail safe criteria until such time we pass the ratio percentage test?  IF we are able to go to the ABT to pass coverage - it looks like we need to really ramp up the level of contributions people are getting - to the point where some NHCE (non-leased) are getting almost 40% of their compensation in an allocation.  The other thought is we could do a corrective amendment to bring in the people (leased) needed to pass the ABT.  

Sadly, it appears that the prior TPA did not do anything with respect to the leased employees.  Population is roughly 18 employees - of which 4 are highly - 5 haven't met the eligibility requirements and they have 13 leased employees that must be counted in the testing as not benefiting.  

Any thoughts?  I feel terrible for the client as they have had this relationship with the leased employees for years - and it's now just being addressed. 

[CuseFan]

I think you have to do what the plan says and apply the failsafe (we always use 11g after learning tough lesson years ago). In aggregation the CB then satisfies coverage, but now you have NDT and gateway and TH et al headaches. Yes, you can empathize with the client over their prior TPA's lack of service/attention, but your job is to consult with them on how to fix their plans. Good luck

[John Feldt ERPA CPC QPA]

4 of the 13 leased employees are HCEs? Of the non-leased employees eligible for the DC plan, what is the number of HCEs and NHCEs in that group?

After getting that info for the coverage test for the combo, 401(a)(26) should also be reviewed.

[Y401k]

The numbers are as follows:  a total of 22 people must be included in the coverage testing - 4HCE / 9NHCE / 13 Leased all NHCE and meeting the definition of a leased employee under 414(n).  Yep 401(a)(26) is also not passing unless we ramp up the benefits being given in the CB plan.  The rates of contributions to the actual employees to get the ABT to test are funny money numbers to staff.  I think we can do a corrective amendment and bring in enough of the leased employees for 2021 to pass by following the criteria in the DC document for the fail safe.  Does this seem reasonable?  Unfortunately they will need to get TH/Gateway of approximately 7.5%.  One item to note here - All HCEs and the 9NHCEs are already benefitting so through the fail safe measures we don't have anyone else to bring in outside of the leased employees. I know the client will be wondering if he has had leased all these years and the plans have been in place for 10 years - why has this never been addressed (good question for sure).