3763. What are the miscellaneous rules associated with the minimum coverage requirement for qualified plans?Nuco Employeercline202015-07-15T20:53:00Z2015-07-15T20:53:00Z717169783Summit Business Media81221147714Site Map/Retirement Plans/Pension And Profit Sharing/Qualification/Minimum Participation and Coverage ratio percentage test average benefit separate line business aggregation disaggregation nondiscrimination2005-01-25T00:00:00ZTaxFactsDefaultArticle115880326-00-tf1.xml328.00;#2250;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What is the “minimum coverage” requirement for qualified plans?84200.0000000000TaxFactsDefaultArticle2010-01-14T23:56:08ZSBMEDIA\moss-admin3763. What are the miscellaneous rules associated with the minimum coverage requirement for qualified plans?Separate Lines of BusinessEmployers that operate separate lines of business may apply the tests discussed in Q 3762.02 and Q 3762.03 separately with respect to employees in each line of business, so long as any such plan benefits a class of employees that is determined, on a company wide basis, not to be discriminatory in favor of highly compensated employees..IRC Sec. 410(b)(5). A separate line of business exists if the employer, for bona fide business reasons, maintains separate lines of business or operating units. A separate line of business, however, cannot have fewer than fifty employees, disregarding any employees excluded from the top-paid group when determining the employees who are highly compensated (Q 3827). A separate line of business also must meet either a statutory safe harbor with respect to ratios of highly compensated employees provided in the IRC, meet one of the administrative safe harbors provided in final regulations, or request and receive an individual determination from the IRS that the separate line of business satisfies administrative scrutiny..IRC Sec. 414(r); Treas. Regs. §§1.414(r)-5, 1.414(r)-6.Former EmployeesActive and former employees are tested separately for purposes of the rules..Treas. Reg. §1.410(b)-2(a). A plan satisfies the coverage requirement with respect to former employees only if, under all the relevant facts and circumstances, the group of former employees’ plan does not discriminate significantly in favor of highly compensated former employees..Treas. Reg. §1.410(b)-2(c)(2).Excludable EmployeesCertain otherwise eligible employees can be excluded from coverage testing. They include employees covered by a collective bargaining agreement, provided that retirement benefits were the subject of good faith bargaining between the employee representatives and the employer, and non-resident aliens who receive no U.S. earned income..IRC Sec. 410(b)(3); Treas. Regs. §§1.410(b)-6(d), 1.410(b)-9. Although a plan may permit an otherwise eligible employee to waive his or her right to participate, such a waiver may, under some circumstances, result in discriminatory coverage..See Rev. Rul. 80-351, 1980-2 CB 152. But see Olmo v. Comm., TC Memo 1979-286, Non-acq., 1980 AOD LEXIS 135. Employees who have not satisfied the plan’s minimum age and service requirements and are not participants are excluded from consideration in meeting the above tests..IRC Sec. 410(b)(2)(D). Other employees who meet the plan’s age and service requirements may be excluded under the terms of the plan. Such excluded employees include, but are not limited to, employees who, once eligible for the plan, are required to be employed on the last day of the plan year, similar employees who are required to have been credited with at least 1,000 hours in the plan year, and employees who are excluded as a class such as hourly or salaried employees..Treas. Regs. §1.410(b)-6(b). Employees Treated as BenefitingAn employee benefits under a plan for a year only if the employee accrues a benefit or receives an allocation under the plan for that year..Treas. Reg. §1.410(b)-3(a). An employee is treated as “benefiting” under a plan for a plan year if the employee satisfies all of the applicable conditions for accruing a benefit for the year but fails to accrue a benefit solely because of the IRC Section 415 limits or some other uniformly applicable plan benefit limit..Treas. Regs. §§1.410(b)-3(a)(2)(ii), 1.410(b)-3(a)(2)(iii).Certain Terminating Employees Excluded from TestingMany plans require an employee to be employed on the last day of the plan year to be eligible to receive a contribution or benefit. A terminated employee who fails to satisfy the minimum hours of service or a last-day requirement may be excluded from consideration in meeting the coverage test if the employee had accrued no more than 500 hours, terminated service during the plan year, and did not receive a benefit in the plan year..Treas. Reg. 1.410(b)-6(f).Mandatory DisaggregationSome plans or portions of plans must be disaggregated to meet the minimum coverage rules. The mandatory disaggregation requirement specifies that certain single plans must be treated as comprising separate plans, each of which is subject to the minimum coverage requirements.Some of the plans that generally have to be disaggregated for coverage purposes are: (1)the portion of a plan that includes a cash or deferred arrangement subject to IRC Section 401(k) (or matching and employee after-tax contributions subject to IRC Section 401(m)), and the portion that does not; (2)the portion of a plan that is an ESOP, and the portion that is a non-ESOP (this varies from the disaggregation rules that would apply under regulations for ADP/ACP testing purposes only (Q 3731, Q 3732);.See Treas. Reg. §1.401(k)-1(b)(4)(v). (3)the portion of a plan that benefits otherwise excludable employees, and the portion that does not, (4)a plan that benefits the employees of a separate line of business, and any plan maintained by any other line of business if the employer elects to use the separate line of business rules, and (5)the portion of a plan that benefits employees under a collective bargaining arrangement, and the portion that benefits non-union employees..Treas. Reg. §1.410(b)-7(c)(4). For testing the benefits of employees who change from one qualified separate line of business to another, a reasonable treatment must be used..Treas. Reg. §1.410(b)-7(c)(4)(i)(D). A multiple employer plan (a plan covering two or more unrelated employers) also is treated as comprising separate plans each of which is maintained by a separate employer and generally must satisfy the minimum coverage requirements by reference only to such employer’s employees..Treas. Reg. §1.410(b)-7(c)(4)(ii)(C).Permissive AggregationFor purposes of applying the ratio percentage test and the non-discriminatory classification test, an employer may elect to designate two or more of its plans as a single plan, but only if the plans have the same plan years..Treas. Regs. §§1.410(b)-7(d)(1), 1.410(b)-7(d)(5). If plans are aggregated under this rule, they must be treated as a single plan for all purposes under IRC Sections 410(b) and 401(a)(4)..Treas. Reg. §1.410(b)-7(d). Of course, plans that are required to be disaggregated under the rules described above cannot be aggregated under this rule. Furthermore, for purposes of applying these tests, the following plans also must be disaggregated: the portion of a plan that is an ESOP, and the portion that is a non-ESOP; and the portion of a plan that includes a cash or deferred arrangement subject to IRC Section 401(k) (or matching and employee after-tax contributions subject to IRC Section 401(m)), and the portion that does not..Treas. Regs. §§1.410(b)-7(c), 1.410(b)-7(d)(2).For purposes of applying the average benefit percentage test, all plans that may be aggregated under the permissive aggregation rules must be aggregated and treated as a single plan. In addition, plans (or portions of plans) that are ESOPs or that are subject to IRC Section 401(k) or 401(m) also must be aggregated with all other qualified plans of the employer..IRC Sec. 401(k)(4)(C); Treas. Reg. §1.410(b)-7(e). A special rule in the final regulations permits benefits provided to collectively bargained employees and non-collectively bargained employees to be considered together, for purposes of the average benefit percentage test only, if certain requirements are met..See Treas. Reg. §1.410(b)-5(f).Snapshot TestingThe IRC states that a plan will be considered as meeting the minimum coverage requirement during the whole of any taxable year of the plan if on one day in each quarter it satisfied that requirement..IRC Sec. 401(a)(6). Employers may demonstrate compliance with the coverage requirement using “snapshot” testing on a single day during the plan year, provided that that day is representative of the employer’s work force and the plan’s coverage throughout the plan year..Rev. Proc. 93-42, 1993-2 CB 540. Corrective AmendmentsA plan that does not satisfy the minimum coverage requirement during a plan year may be retroactively amended by the fifteenth day of the tenth month after the close of the plan year to satisfy one of the tests..Treas. Regs. §§1.401(a)(4)-11(g)(2), 1.401(a)(4)-11(g)(3)(iv). This amendment would have the effect of including individuals who had been excluded by the plan. A retroactive amendment must separately satisfy the non-discrimination and minimum coverage requirements, and cannot violate the anti-cutback rule of IRC Section 411(d)(6) (Q 3777, Q 3786)..Treas. Reg. §1.401(a)(4)-11(g)(3).Merger or AcquisitionThe IRC provides certain transition relief from the coverage rules in the event of a merger or acquisition..See IRC Sec. 410(b)(6)(C). The IRS has provided guidance for certain changes in a plan sponsors’ controlled group, offering temporary relief from the coverage requirements provided that each plan has satisfied the coverage requirements prior to the change in the controlled group and no significant change in the plan or its coverage takes place during the transition period, other than the change resulting from the merger or acquisition itself..For details, see Rev. Rul. 2004-11, 2004-7 IRB 480.Effect of Non-ComplianceSpecial rules apply to prevent a loss of tax qualification when a plan fails to qualify solely because it does not meet one of the coverage tests. In this case, contributions on behalf of non-highly compensated employees will not be taxed under the rules for non-qualified plans. (Presumably, all other complications arising from plan disqualification would apply.) Instead, highly compensated employees will be required to include in income the amount of their vested accrued benefits, other than their investment in the contract..IRC Sec. 402(b)(2).The minimum coverage requirement generally is inapplicable to church plans and governmental plans are treated as meeting the coverage provisions..See IRC Secs. 410(c)(1)(B), 410(c)(2). The coverage regulations generally apply to tax-exempt organizations; however, non-contributory plans maintained by certain tax-exempt organizations (i.e., a society, order, or association described in IRC Sections 501(c)(8) or 501(c)(9)) are not subject to the coverage requirements..IRC Sec. 410(c)(1)(D).Plan for Sole ShareholderA corporation may establish a qualified plan even though it has only one permanent employee and that employee owns all the stock of the corporation. If the plan is either designed or operated so that only the shareholder-employee can ever benefit, however, it will not qualify. Provision must be made for participation of future employees if any are hired..Rev. Rul. 63-108, 1963-1 CB 87; Rev. Rul. 55-81, 1955-1 CB 392. A pension plan will not fail to qualify merely because it is established by a corporation that is operated for the purpose of selling the services, abilities, or talents of its only employee, who is also its principal or sole shareholder..Rev. Rul. 72-4, 1972-1 CB 105 (amplifying Rev. Rul. 55-81). The plan of a corporation’s sole shareholder was disqualified for violating the coverage requirement after it was shown that the only two hired personnel of the company, who had been excluded from the plan as independent contractors, in fact were employees..See Kenney v. Comm., TC Memo 1995-431.As to which individuals must be treated as employees and what organizations make up an employer, see Q 3825, Q 3826, Q 3830, and Q 3832.