14.4 Deemed-Pass Situations & Correcting a Failed Coverage Test
Key Takeaways
- A plan is deemed to satisfy IRC §410(b) in three situations: the employer has no non-highly compensated employees, the plan benefits no highly compensated employees, or the plan benefits only collectively bargained employees.
- A coverage failure may be corrected by a retroactive amendment under Treas. Reg. §1.401(a)(4)-11(g) adopted no later than 9½ months after the close of the plan year, expanding the group who benefit.
- An 11(g) amendment must provide a meaningful benefit and may only add benefits; it can never reduce a benefit already accrued, and the added group must include enough NHCEs to pass.
- A fail-safe provision written into the plan document expands coverage automatically by a defined ordering rule, avoiding the need for a discretionary corrective amendment.
Three Ways to Pass Without Doing the Math
Before running a ratio percentage calculation, the administrator should ask whether the plan is deemed to satisfy IRC §410(b) at all. There are exactly three situations, and the exam asks for them by name.
1. The Employer Has No NHCEs
If every employee of the employer (after applying the statutory exclusions) is an HCE, coverage is automatically satisfied. There is no protected class to discriminate against. This arises in small professional practices where the only employees are the owner-physicians or owner-attorneys.
The arithmetic reason: the ratio percentage is the NHCE benefiting percentage divided by the HCE benefiting percentage. With zero NHCEs the fraction is undefined, so the regulation supplies a deemed pass rather than a division by zero.
2. The Plan Benefits No HCEs
A plan covering only NHCEs cannot discriminate in favor of HCEs. This is common with a plan covering only a non-union hourly division while the owners participate in a separate arrangement, or a plan established solely for a rank-and-file subsidiary.
3. The Plan Benefits Only Collectively Bargained Employees
A plan benefiting only employees covered by a collective bargaining agreement, where retirement benefits were the subject of good-faith bargaining, is deemed to satisfy §410(b). Congress reasoned that arm's-length union negotiation is its own protection against discrimination.
Note the mirror image: for a non-collectively-bargained plan, union employees are statutorily excludable from the testing group entirely under Treas. Reg. §1.410(b)-6(d). The same population is excluded from one test and forms the deemed-pass basis of the other.
| Deemed-pass situation | Statutory logic |
|---|---|
| No NHCEs employed | No protected class exists |
| No HCEs benefit | No favored class benefits |
| Only collectively bargained employees benefit | Good-faith bargaining substitutes for testing |
When the Plan Actually Fails
A plan fails §410(b) when it passes neither the ratio percentage test (NHCE benefiting % ÷ HCE benefiting % ≥ 70%) nor the average benefits test. The consequence, if uncorrected, is severe: the plan is not qualified for the year, which would make the trust taxable, the employer's deduction deferred, and — under IRC §402(b)(4) — HCEs immediately taxable on their entire vested account balance. That last consequence is precisely why coverage failures get corrected rather than litigated.
Correction Option 1: The Retroactive Amendment — Treas. Reg. §1.401(a)(4)-11(g)
The primary correction. The employer amends the plan retroactively to bring additional employees into the benefiting group for the failed plan year.
| Requirement | Detail |
|---|---|
| Deadline | Adopted no later than 9½ months after the close of the plan year — October 15 for a calendar-year plan |
| Direction | May only increase benefits; may never reduce a benefit already accrued |
| Meaningful benefit | The amendment must provide a substantive benefit to the added employees; a token allocation designed only to change a headcount will not be respected |
| Who is added | Enough NHCEs, chosen by a nondiscriminatory criterion, that the plan passes |
| Effect | The amendment is treated as if adopted on the first day of the plan year |
| Funding | The employer must actually contribute the amounts, adjusted for earnings from the original allocation date |
The 11(g) amendment must also independently satisfy §401(a)(4) — you cannot fix coverage by adding only the highest-paid NHCEs while ignoring the rest.
Worked example. Vireo Systems' 2026 profit-sharing allocation has a last-day employment condition. Results: 8 of 10 HCEs benefit (80.0%); 21 of 60 NHCEs benefit (35.0%). Ratio percentage = 35.0 ÷ 80.0 = 43.75% — a clear failure, and the average benefits test also fails.
To reach 70%, the NHCE benefiting percentage must be at least 0.70 × 80.0% = 56.0%, which requires 0.56 × 60 = 33.6 → 34 NHCEs benefiting. Vireo adopts an 11(g) amendment by October 15, 2027 waiving the last-day condition for NHCEs who completed at least 500 hours, bringing 14 additional NHCEs in for a total of 35 (58.3%). New ratio percentage = 58.3 ÷ 80.0 = 72.9%. Passes. Vireo funds those 14 allocations plus earnings from the original allocation date.
Correction Option 2: Fail-Safe Language
Rather than relying on a discretionary amendment every time, many documents contain a fail-safe provision — a pre-written rule that automatically expands coverage when the test fails. A typical ordering rule brings in non-benefiting NHCEs in a defined sequence: those who terminated latest in the year first, or those with the most hours first, continuing until the plan passes.
| Fail-safe | 11(g) amendment |
|---|---|
| Automatic; no employer decision required | Requires an adopted amendment |
| Operates by document terms | Discretionary each year |
| Ordering rule fixed in advance | Employer chooses whom to add, subject to nondiscrimination |
| No 9½-month deadline concern | Must be adopted within 9½ months of year end |
The trade-off: a fail-safe removes discretion and can pull in more employees than a carefully targeted 11(g) amendment would. Sponsors who want flexibility omit it; sponsors who want certainty include it.
Correction Option 3: EPCRS
If the 9½-month window has closed, the failure is corrected under EPCRS — self-correction where available, or a Voluntary Correction Program submission with a compliance fee. The corrective action is substantively the same: retroactively benefit enough NHCEs, with earnings. Correcting under audit through Audit CAP carries a materially higher sanction, which is the practical argument for finding coverage failures early.
Other Structural Fixes
- Permissive aggregation — combine the failing plan with another plan of the employer under Treas. Reg. §1.410(b)-7(d) and test them as a single plan, provided they are tested together for §401(a)(4) as well.
- Disaggregating otherwise excludable employees under IRC §410(b)(4)(B), testing the under-21/under-one-year group separately.
- Amending eligibility prospectively so the failure does not recur.
Common ASPPA QKA Exam Traps
- Trap 1 — Listing only two deemed-pass situations. There are three: no NHCEs, no HCEs benefiting, and only collectively bargained employees benefiting.
- Trap 2 — Using a 12-month amendment deadline. The 11(g) window is 9½ months after the plan year closes.
- Trap 3 — Reducing benefits to fix coverage. An 11(g) amendment may only add.
- Trap 4 — A token allocation. The added benefit must be meaningful.
- Trap 5 — Confusing the union rules. Union employees are excludable from a non-bargained plan's testing group; a plan covering only union employees is deemed to pass.
- Trap 6 — Forgetting §402(b)(4). An uncorrected coverage failure taxes HCEs on their entire vested balance.
Which of the following is NOT one of the three situations in which a plan is deemed to satisfy the IRC §410(b) coverage requirement?
Vireo Systems fails coverage for its 2026 calendar plan year. By when must a retroactive corrective amendment under Treas. Reg. §1.401(a)(4)-11(g) be adopted, and what may it do?
A plan's 2026 allocation benefits 8 of 10 HCEs and 21 of 60 NHCEs. How many NHCEs in total must benefit for the plan to pass the ratio percentage test?