Coverage problems with excluding employees eligible for a money purcha

[Guest MES]

Employer sponsors a 401(k) plan. Effective 3/1/01, the employer is also sponsoring a money purchase plan to cover a prevailing wage contract (davis-bacon) for their hourly employees. The money purchase plan has a 15% contribution. The Employer now wants to amend the 401(k) to exclude the hourly employees, who are the ones covered by the prevailing wage contract, since the hourly employees participation rates have always been poor and is likely to decline once they begin receiving the money purchase plan contribution.

The 401(k) plan itself would not pass coverage if these employees were excluded. However does it make a difference that they are the ones eligible under the money purchase plan? does the money purchase plan correct the coverage issue? Would allowing the hourly employees to opt out be a better option? (Or would they then still be included on the APD test?)

I appreciate any insight you may have.

[actuarysmith]

This seems like a non-issue. Now that 401(a)(26) no longer applies to DC plans, we will probably see more "segment" plans (i.e. plans set up to cover different groups).

The plans can be aggregated for discrim testing and will most likely pass. I would guess that a large portion of the hourly employees covered under the Davis Bacon are non-Highly Compensated Employees. Since they are getting a large benefit, the testing should be no problemo.

As far as just letting the Davis Bacon folks opt out of the 401(k)rather than excluding them - you would still have to include them in your ADP/ACP testing (probably with a bunch of zeros). I think that you would need to exclude them by definition.

[MWeddell]

Different analysis, but perhaps the same result as the above post.

One cannot aggregate for 410(B) testing a 401(k) arrangement and employer nonmatching contributions such as the 15% money purchase plan contribution. However, the 401(k) plan probably can pass the average benefit percentage test given the 15% contribution (which does get included in that test), so the ratio percentage of the 401(k) plan needs only to exceed 20%-50% in the nondiscriminatory classification test. Hopefully, you can pass that lower threshold.

[Guest MES]

Upon reviewing the census, this really does appear to be a non-issue. Although it's a small plan (13 employees, 10 of whom would be excluded from the 401(k)), there are no HCEs. Thanks for your input!

[actuarysmith]

Sorry......MWeddell is right about not being able to aggregate 401(k) and MP for 410(B). I've been looking at too many 3/15 ADP/ACP tests and fried my brain circuits.

Since you do not have any HCE's it appears that you are free to proceed as planned. Good Luck!

[Guest MES]

I spoke too soon. The census didn't have ownership info. I have 2 HCEs. But the contribution in the MP plan is going to be 15%. The 401(k) provides for a match of 50% up to 6% of comp, and one of the HCE's doesn't defer. I"m working on the average benefits test, but it should be okay.

[Guest]

lets see if I understand you correctly.

13 employees

2 HCES

11 NHCEs

of the nhces, 10 are in the MP, and they want to exclude from ADP test.

so for 401(k) coverage you have 1 nhce includable and benefiting. I do not see how this will pass coverage.

1/11 is only 9%. (it does not matter if the HCEs defer or not, they are treated as benefiting.

9% fails the ratio % test.

9% will also be less than the safe harbor % (and unsafe harbor %) of the plan, so the plan will the acg ben % test as well.

nhce concentration %=81 for an unsafe harbor % of 24.25%.

looks like you need at least 3 NHCEs in the 401k plan

[Guest MES]

I agree, those are the numbers I came up with also. As a novice with the average benefits test, I was afraid that was the conclusion to be reached. Again - thank for the information.

[MWeddell]

I agree with Tom Poje's calculations, but want to elaborate on two points.

When Tom says that it looks like you need at least 3 NHCEs eligible for the 401(k) plan, that would suffice only to get above the unsafe harbor percentage. You'd either need 4 NHCEs so that (4/11)/(2/2) = 36.36% > 34.25% safe harbor percentage or you'd need obtain IRS approval that being above the 24.25% unsafe harbor percentage was sufficient. See Treas. Reg. 1.410(B)-4©(3)(ii).

Second, if you're going to include anything less than 8 out of the 11 NHCEs, i.e. anything so that your ratio percentage is below 70%, then the classification of which NHCEs are eligible has to be "reasonable" and "established under objective business criteria." See Treas. Reg. 1.410(B)-4(B). You can't just arbitrarily pick any 3 or 4 NHCEs.

Maybe I'm just repeating things you already knew, but I thought I'd mention these points.

[Guest]

thanks for pointing all that out. sometimes when answering a question only the bare minimums get pointed out and not the extra 'but you also have to...'

my apolgies for an incomplete answer.