controlled group, two plans, failing coverage - problems!

I'm getting all turned around on this one...

Due to purchases, a controlled group has ended up with two plans.  Plan R (that I just found out about) is 401k and safe harbor match with no HCEs but ~1/2 of the NHCEs excluded in a "per diem employee" class ("well, we have no HCEs because the owners don't take compensation, so we don't have an issue").  Plan N, my plan, is 401k and regular match, and has 2 HCEs.  So I'm pretty sure this is going to fail coverage:

R total NHCEs: 216
R benefitting NHCES (under either deferral or SHM): 114
N benefitting HCEs: 100%
N benefitting NHCES (under either deferral or regular match): 33

I tried for a QSLOB, but the owners say that they are involved in managing both businesses... yet they don't draw pay from either one.

So this is a 410(b) problem on both the deferral and the match side.  This is where I'm stuck - I don't see a way forward.  Even making the N plan safe harbor for 1/1/22 might not fix this, because with all those excluded NHCEs in the R plan, that's always about 40% of the NHCE population.

How do I fix this?  Thanks.

Besides calling in an ERISA attorney to help with the VCP?  Well, here is the direction I would go. As you indicate make the plans the same, whether that is safe harbor or not.  The NHCE benefitting percentage should well exceed the safe harobr percentage (20.75% it looks like), so your target is passing the ABT.  Assuming your HCE's aren't significantly older than the average age of the NHCE's you will need to goose the NHCE percentage.  This calls for a bottom up QNEC (remember the 5% limitation). Another thought: what about excluding the two HCE's, wouldn't that fix the future?

QSLOB also has a minimum 50 employee requirement for each QSLOB. If the purchase was recent, use the transition rule under IRC section 410(b)(6)(C) - also check the plan documents. Also, with no HCEs, why provide safe harbor?

Your minimum safe harbor percentage will probably be fairly low - based on the high concentration percent you likely have of NHCEs overall - have you tried running the average benefit percent test, assuming your document allows?

if none of the above can produce a passing result, you can give employer N an amendment under treasury regulation 1.401(a)(4)-11(g) to provide QNECs and QMACs to enough wisely chosen NHCEs from either N or R to make it pass. But run The average benefits test first and if you have enough NHCEs that are benefiting and younger than the HCEs, perhaps run it on a benefits-basis rather than on a contributions basis.

You say this happened due to purchases and you just found out about the other plan, so I assume you hopefully have time under the transition rules to be able to get this sorted out.

Plan R has a large contingent of "per diem" class of employees - those called in to work on a day to day basis. I would do a deeper dig on that population with respect to hours history. If that much of their population is in this class, it might be that the majority have never worked more than 1000 hours in a year and may be statutorily excluded. 

If this group predominantly works 1000+ hours per year, then this classification itself may be problematic and was a smokescreen attempt to exclude part-time employees. Even if not the previous intent, it's like salaried employees are in, hourly employees are out, and that is just fine until you fail coverage because hourlies far out number salaried.

If you can't find enough statutory exclusions amongst the per diem (we just need 11,780 votes, er, exclusions) then I would run average benefits as the next step and progress from there.

@John Feldt ERPA CPC QPA, the company that sponsors N has a decent union population, so I was going to use that to get over the 50+ employee threshold for the QSLOB.

I don't know why Plan R is built that way.

You and @Mike Preston both suggest the bottom-up QNEC (which I'll have to retroactively add), so I'd give up to 5% to... does it have to be the lowest paid that are eligible?  Or the lowest paid that are participants (whether in Plan N or Plan R, i.e., not in the excluded class)?  Or the lowest paid in Plan N?

I'm going to need a lot more detailed information about the Plan R people before I can do that, of course - I just got enough to look at a ratio percentage test.

Yes, excluding HCEs going forward would be the best way.  I'm still trying to convince them of that.  They seem to think it will make hiring new top people harder, go figure.  The problem there really is that the non-owner HCEs in N have their comp bounce between $115K and $135K, so "excluding HCEs" is going to be difficult.  It will take a lot of coordination to tell them who can and can't defer in the following year... and I'm not sure their HR dept is up to the challenge.

@CuseFan, the purchase was in 2018; this ownership group came in and purchased N from my former client - I've been getting resistance and odd data for a couple of years, and now that I have a deferring HCE I dug in my heels because I knew I had to get answers.  So we're out of transition time.  But you raise a good point about maybe some of those per diems might actually not be eligible.  One more thing to dig deeper on.

Thanks for the good ideas.  Hopefully something works and we don't end up in VCP.  The good news is that, if N were to stand on it's own, it would be failing ADP (it's a small refund), so by giving some QNECs to N's NHCES, that might mitigate that entirely!