Cash Balance - Minimum Participation Failure - How to Correct?

[waid10]

We have a Cash Balance Plan. Under 401(a)(26), we must have 50 participants. We have a cycle where annual contributions are set for 3 years. Assume we have 51 participants in year 1, all receiving meaningful accruals. If we have 3 participants retire in year 2, putting us at 48 participants, how do we correct since we have fallen below the minimum participation threshold? Added fact: all participants are HCEs.

Thanks.

[truphao]

it is a smaller of 50 participants or 40% of employees but no less than 2 people (unless 1 owner).

[Peter Gulia]

Imagine an employer has 200 nonexcludable employees, which means 50 employees is the lesser-of for Internal Revenue Code § 401(a)(26)(A).

Is the fix a corrective amendment to cover a few more employees?

See 26 C.F.R. § 1.401(a)(26)-7(c) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(26)-7#p-1.401(a)(26)-7(c).

[waid10]

19 hours ago, truphao said:

it is a smaller of 50 participants or 40% of employees but no less than 2 people (unless 1 owner).

Yes. Our "lesser" number is the 50 participants. So we fail the test if we fall below that number.

[waid10]

11 hours ago, Peter Gulia said:

Imagine an employer has 200 nonexcludable employees, which means 50 employees is the lesser-of for Internal Revenue Code § 401(a)(26)(A).

Is the fix a corrective amendment to cover a few more employees?

See 26 C.F.R. § 1.401(a)(26)-7(c) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(26)-7#p-1.401(a)(26)-7(c).

Thanks Peter. I saw that as well. Our eligibility provisions provide that an employee becomes eligible for the plan when he/she becomes a shareholder. My reading of the corrective amendment fix is that the amendment would have to alter the eligibility provisions to allow for some non-shareholders to participate (in order to get above the 50 threshold).

[C. B. Zeller]

A corrective amendment under 1.401(a)(26)-7(c) is subject to the same requirements as a corrective amendment under 1.401(a)(4)-11(g)—in particular, the amendment must satisfy coverage and nondiscrimination testing on its own. If the individual(s) you are looking to bring in to the plan under the amendment is/are HCE, and the employer has any non-excludable non-HCEs, the amendment would not be allowed. The same is true if you are looking to satisfy the meaningful benefit portion of the test by increasing an HCE who is already benefiting at a lower level—you could not increase them on their own without also benefiting some non-HCEs.

Note this is only true for a corrective amendment adopted after the end of the year. Assuming a calendar year plan, it is currently too late to fix under -7(c) for 2022, but if you are looking at 2023, then you could expand the group of participating employees in any way you like before the end of the year without the additional restrictions of -11(g). In addition, although there is currently some ambiguity around when this becomes effective, you will (eventually) be able to adopt an amendment retroactively to fix this under 401(b)(3) (as added by SECURE 2.0 sec. 316) without the additional restrictions of -11(g).

One last thing—does your plan document include a 401(a)(26) fail-safe? If so, follow its terms before you start looking at corrective amendments.

[Jakyasar]

"In addition, although there is currently some ambiguity around when this becomes effective, you will (eventually) be able to adopt an amendment retroactively to fix this under 401(b)(3) (as added by SECURE 2.0 sec. 316) without the additional restrictions of -11(g)."

I do not think we know yet if this is applicable for an amendment adopted in 2024 and it is retro for 2023. At ASPPA this was still an open item, last I remember (I may be wrong in remembering). It is definitely valid for an amendment adopted in 2025 retro to 2024. 11-g will be a thing of the past. Still waiting on regulations though and see how restrictive this amendment is going to be, if any.

To avoid any issues, as Corey suggested, fix it in during 2023 and be done with especially if you have any NHCEs where 11-g is not going to pass if you only provide it to HCE.

Another point, if you wait till 2024 to have an 11-g amendment (assuming you cannot retroactively amend as per above) and the document has an automatic fail safe language (no document should have this IMHO), you may have issues depending on how it is written.