Correcting Failed 401(m) Ratio % Test

A 401(k) plan has 1000 hour and last day requirement to receive match - fails the 401(m) ratio % test for 2020.  In regards to correcting Coverage, the plan document states:

"The Employer Contribution will also be allocated to individual Participants in the order specified until the Plan satisfies the minimum coverage requirements. A Participant, and all similarly situated participants, will be included only if necessary to satisfy those requirements."

It then goes on to say you start with participants that worked the most hours that were still employed on the last day of the year, then work your way down to terminated participants with the most hours...

We need to bring in several NHCE that terminated prior to 12/31/2020 to pass the ratio % test for 401(m).  We have two HCE that are not benefiting under 401(m) because they terminated employment before 12/31/2020 who worked more hours than any of the NHCE we are bringing into the match.  Does the "only if necessary to satisfy those requirements" allow us to ignore those two HCE's?  I sure hope so because we can't pass if we have to include those two HCE.

That would be an extremely poorly designed fail-safe if it could bring in HCEs who were not benefiting.

Can the plan pass coverage on the average benefits test? Hopefully its use is not precluded by the plan document.

I felt stupid asking the question and I'll blame it on testing fatigue.  The fail-safe just wasn't as clear to me as I wanted it to be but I have to believe the intent of the language was to only include NHCE.  The ABT wasn't going to work in this case.  I didn't put the details in the initial post but this is a control group with two plans - one safe harbor match and the other discretionary (much smaller) match.  The discretionary match plan wasn't passing the RPT or ABT.  Using the fail-safe for RPT was their only hope.

The failsafe is never your only hope. You can do an -11(g) amendment to correct a failed coverage test. However if the plan document says that a coverage failure will be corrected under the failsafe then you have to follow the terms of the plan document and apply the failsafe.

This is a big reason why I advise against the use of the failsafe is most cases; once it's in the document you are stuck with it. You have a lot more flexibility with an -11(g) amendment to correct the failure in the way you want.

In our documents we can elect in the adoption Agreement whether or not to apply the fail-safe.  I'm with you here, I much prefer an -11(g) amendment and that is how we prepare the documents for our clients.  In this case the plan is using the document of another vendor and there is no such election in the AA.