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ADP test and Statutory exclusions


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13 replies to this topic

#1 rcline46

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Posted 05 January 2006 - 08:47 PM

After 22 years of doing ADP tests I stumbled on a new twist!

Another TPA firm is using Statutory Exclusions in the year in which a previously eligible employee terminates. That is, an employee has been in the plan for several years, but since they worked under 500 hours in the year in which they terminate they are treated as statutory excludibles.

The TPA refers to the statutory excludible regs.

Now I know you can do this BEFORE an employee is required to be in (21/1 etc), but AFTER satisfying the rules?

Willing to learn.

#2 Tom Poje

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Posted 06 January 2006 - 07:54 AM

c'mon, you can't fool me. only 22 years? how much of a setback are you using in the value? :D

when addressing otherwise excludables the 401k regs refers to 1.410(b)-6(b)(3) and 7©(3)
6(b)(3) which refer to code section 410(a)(1). I dont see anything there that refers to 'terminees with less than 500 hours'.
in fact, section 1.410(b)-6(b)(3) says you can't use 410(a)(1)(B) which is a 2-year wait for deferrals for otherwise excludables, so I am not sure how they get around the rule.

bah. I must find a way to stop filing dead lines from coming


#3 pmacduff

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Posted 06 January 2006 - 01:37 PM

rc - I'm right behind you with 16 years...it was funny you should mention this particular situation. We took over a plan in '05 and when I reviewed the '04 testing, I found the same thing, participants who were previously in the Plan, terminate with less than 500, show up in the prior TPAs test as statutorily excludable (say that 3 times fast!). In any event, I too was baffled, this was not a small TPA firm....what's going on?!?!?

#4 Guest_named_Harry O_*

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Posted 06 January 2006 - 02:22 PM

I think this is a defensible postion for purposes of the ACP test where the only contributions taken into account are matching contributions and the plan requires the employee to be employed at year end or to work a minimum number of hours to receive an allocation. I'm not sure it works for the ADP test since I believe that the regulations are clear that an employee eligible to make deferrals for any portion of the plan year is an eligible employee for ADP purposes.

#5 AndyH

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Posted 06 January 2006 - 04:15 PM

Many

C L U E L E S S

people work in this business. Makes you wonder about other types of business.

#6 rcline46

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Posted 06 January 2006 - 04:40 PM

Harry O - note that they ARE in the ADP test, but moved to statutorily excludible. I am hoping that someone who is doing this can explain their interpretation to me as right now I don't see it.

What really scares me is that Andy H might be right.

Does anyone see/get this interpretation from the Pension Outline Book? Regulations?

Conversely - do you see anything that would argue against it? I have to read the sources again to see if any of them say something to the effect 'have never satisfied statutory eligibility'.

#7 Guest_named_Pensions in Paradise_*

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Posted 06 January 2006 - 05:38 PM

They are not excludable from the ADP test. See page 11.41 of The ERISA Outline Book.

#8 Tom Poje

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Posted 09 January 2006 - 07:46 AM

I would hold that 11.335 (2005 edition ERISA Outline Book) is even clearer.
"An otherwise excludable employee is an eligible employee who would not have been an eligible employee if the one year of service and/or age 21 age requirement were imposed"
don't see anything in their about terminees < 500 hours.
I would further add the main argument regarding otherwise excludables is whether the plans entry dates apply (e.g. monthly or whatever) and at the Q and As the IRS has said ok to use the maximum allowed by law (first day of plan year or 6 months after meeting requirements).
once in under maximum exclusion, you are in.

bah. I must find a way to stop filing dead lines from coming


#9 rcline46

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Posted 09 January 2006 - 04:33 PM

regs 1.410(b)-7c3 and -6b3 make interesting reading. The word 'ever' is not in the regulations and so by a BBBIIIIGGGG stretch you might make the satisfaction of 21/1 an annual test. I don't buy it.

Throughout the regulations the words 'satisfied' and 'employees who have not met' keep cropping up. An interesting note is that ONLY plans who permit early entry can avail themselves of this technique according to the regulations. With just this item, I don't see how terminees could possibly get into the test on plans using 21/1 as standard, therefore they cannot get in even if plan uses early entry.

#10 Tom Poje

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Posted 10 January 2006 - 08:04 AM

I like the logic.
so here is what the 'administrator' is trying to say

plan has maximum 1 year wait/age 21.
otherwise excludable option not available for terminee who has performed service for 3 years.

plan has immediately eligibility. therefore otherwise excludable option is available, even for a terminee with 66 years of service like mr. cline. :lol:

what would Mr. Spock say....

I think the difference is that otherwise excludable deals with eligibility to enter the plan.
the 500 hours rule deals with eligibiility for an allocation.
big difference.

bah. I must find a way to stop filing dead lines from coming


#11 pmacduff

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Posted 10 January 2006 - 04:47 PM

Ahhh - Mr. Poje hit the nail on the head for me..."I think the difference is that otherwise excludable deals with eligibility to enter the plan". How can you exclude someone who has already entered the Plan? I wonder of any of these suspicious 401(k) tests (as in my takeover plan) have undergone the scruinty of an IRS or DOL audit...ummm...

#12 jquazza

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Posted 10 January 2006 - 07:27 PM

And if I might add my grain of salt (kick it up another notch on the conservative scale,) you can only use the terrm w/<500 exclusion if the reason the participant was excluded from the allocation was actually the last day or service requirement. Say a plan excludes hourly employees and has a last day requirement for the match. An hourly employee with five years of service quits with less than 500 hours, that employee is not excludable, because the reason he didn't get the match is not because he quit, it's because he's hourly.

I have seen SOOOOOOO many plans missinterpreting that rule.
/JPQ

#13 jusducki

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Posted 31 January 2006 - 09:15 AM

So - in the following situation can the described group of employees be eliminated from the ADP/ACP testing?

Age 21/1 month of service - eligible to enroll on next calendar quarter

If employed in December, joins in January, terminates in March, need to be in testing?

If employed in December, joins in January, terminates in May, need to be in testing?

Plan has last day rule to get Match. Thanks in advance.

#14 rcline46

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Posted 31 January 2006 - 09:27 AM

jusducki, you have missed the point of the discussion. To answer your question, you did not say if hired December 1 or after December 1 so whether eligible January 1 or April 1 is a question.

However, should that person reach an entry date they are required to be in the ADP testing. The question is whether they are part of the 'otherwise excludable' group. They are.

My question is on termination AFTER completing 21 and 1 year of service, maybe several years ago.