3846 / What effect does noncompliance with the minimum coverage requirements have upon a qualified plan?

Special 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 nonhighly compensated employees will not be taxed under the rules for nonqualified 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.¹

The minimum coverage requirement generally is inapplicable to church plans, governmental plans, and plans that have not provided for employer contributions at any time after September 2, 1974. The coverage regulations generally apply to tax-exempt organizations; however, and 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.² Other than governmental plans, these plans are treated as meeting the coverage provisions only if they meet the coverage requirements of IRC Section 401(a)(3) as in effect on September 1, 1974.³