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Statutory exclusion question.


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27 replies to this topic

#1 MR

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Posted 24 January 2001 - 06:00 PM

OK - statutory exclusion question. Lets say an employee is hired april 1, 1999 and terminates august 1, 2000. I think you can exclude this person. Statutory entry dates can be the earlier of the first day of the plan year or six months after meeting the statutory 1-year requirements. This person was not employed six months after completing 12 months. Any thoughts?

#2 Richard Anderson

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Posted 24 January 2001 - 08:17 PM

MR
If you mean can this person be excluded from the plan, then the answer is no; if the plan has dual entry dates, Jan 1 and Jul 1. The person must become a participant on the next entry date after satisfying eligibility.

If you mean can the person be statutorily excluded for testing, the answer is yes.

#3 MR

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Posted 25 January 2001 - 07:12 AM

Thanks, guys.

The issue is whether or not I can exclude him for testing. I should have made that clearer. My conclusion is the same as Richard's. Any others?

#4 rcline46

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Posted 25 January 2001 - 07:38 AM

I disagree that the person can be 'statutorially' excluded. This person has met the 'most stringent eligibility' requirements under law, and must have been employed on a plan entry date.

As shown before, they have 1 year of service (and age 21) completed on March 1, 2000. A plan cannot keep someone out beyond 18 mos, so the most stringent entry date would be July 1, 2000. Once in, tested of course. The IRS at ASPA was making noises that the first plan entry date (date of event, monthly, quarterly, anniv nearest) should be used.

Maybe Mr. Anderson could explain why he believes you can use the statory exclusion?

#5 Richard Anderson

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Posted 25 January 2001 - 07:46 AM

This person met the YOS requirement on April 1, 2000; therefore statutorily must enter the plan on the earlier of the first day of the next plan year (1/1/2001) or six months after meeting the YOS requirement (10/1/2000). The person terminated employment before meeting the statutory requirement at 10/1/2000.

#6 R. Butler

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Posted 25 January 2001 - 08:40 AM

rcline46,

I tend to agree with you that the plan document should determine the entry date for applying the statutory exclusions, but we are probably are in the minority. Just FYI, Tom Poje gives a good analysis of this issue in a previous question "Cam maximum statutory entry date..." If you click on the "more like this one" link you'll see it. (I can't figure out how to do a direct link in my reponses.)

#7 Richard Anderson

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Posted 25 January 2001 - 09:42 AM

R.Butler
I know that there are differing views on this, but do you know if there is any guidance that supports not using the exact 410(a)(4). If the document defined a statutory exclusions to be determined as of plan entry dates, then of course the plan document should be followed. But if the document is silent on how to determine who can be statutorily excluded other than possibly referring to 410(a)(4), I would use a literal interpretation.

The software that we use will statutorily exclude using the 18 month rule, unless the person came into the plan on the first day of the plan year. If we used any other method, we would have to either test manually or find some work-around to fool the system into excluding who we wanted. Is there any software that lets you choose how to define the statutory exclusion other than the 18 month rule?

#8 Tom Poje

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Posted 25 January 2001 - 11:52 AM

For further reading, take a look at one of my favorite resources which is The ERISA Outline book...(Sal Tripodi)
page 8.55 of the 5th edition
"It is not clear under the regulations. There are two approaches, both of which should be considered reasonable in the absence of clear regulations"
approach #1 Use statutory entry dates....
approach #2 Use plans entry dates....
Basis for the two approaches:
#2 focuses on 410(B)(4)©...
proponents of #1 argue that should not apply because it refers to the PLAN's age and service requirements and otherwise excludable employee rules refer to STATUTORY age and service.
The above is an extremely abreviated notation of what's in the book. I always encourage others to go ahead and read the actual material.
Again, that is that book's comments based on the regs as we have them. someday maybe we will be given real clear guidelines.

#9 rcline46

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Posted 25 January 2001 - 01:29 PM

Reasonable people may disagree....

The eligibility rule in ERISA is quite simple. You cannot make someone wait MORE THAN 18 months to enter a plan. (Ignore 2 year wait). You cannot, to my knowledge, get a document approved which states the eligibility is the completion of 18 mos of service. What follows is predicated on this.

THe maximum age and service requirement is 21 and 1 year of service. The latest date of participation allowed under these rules is 1/1 or 7/1 following. Therefore anyone hired from 1/2 to 6/30 will enter the second 7/1. That is a statutory participation date. I see no support for 18 months (except for the 1/2 hire).

The Jim & Dick show has stated it is their opionon that if the plan entry dates are more favorable (date of event, monthly, quarterly) you must use the plan entry date which follows the statutory 21/1. My opinion is you can use the 1/1 or 7/1.

The fact that Mr. Anderson's software uses the 18 months is a decision made by that company, and Mr. Anderson is NOT indemnified if they are wrong. Note that Mr. Anderson is entitled to his own opinion, but I would strongly recommend he, or anyone else confused here, to get their own ERISA counsel to comment. I certainly do not want to have to pay the penalties for a bad interpretation on my part.

#10 Tom Poje

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Posted 25 January 2001 - 01:55 PM

Hey Reed,
hope is going well!
I don't think the argument is about date of participation.
I think its a matter of for testing purposes what do i do.
If I wanted to I could write a plan that says entry date is 'first day of plan year or 18 months after date of hire.' or whatever. in other words, ees hired second half of the year enter 1/1 all others enter 18 onths after date of hire. This would meet the requirements required by the law.
Therefore, using the same logic, if I am going to exclude 'otherwise excludable' employees, it is reasonable to say it consists of the group of employees failing the above entry conditions, because, they were indeed excludable under the limits and conditions of the law.

the argument is whether a plans entry dates should apply to deciding who is 'statutory excludable' and will be tested separately (not 'not tested at all')(If there was an HCE with less than 1 year, then I would have to run the test and include the ee we are talking about)
If I had a plan with immediate eligibility, then try to apply statutory excludable rule, do I say '1 yr age 21, and I am also going to all of a sudden use entry dates of 1/1 and 7/1? I have a consistency problem in that logic.

oh well, I can see the argument on either side.

#11 Richard Anderson

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Posted 25 January 2001 - 02:14 PM

rcline
I don't feel confused.

#12 MR

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Posted 25 January 2001 - 02:26 PM

Could you not have an eligibility of 12 months with entry on the first day of the sixth month following completion?

Sal Tripodi's book, which I usually use as gospel seems to draw too strict a conclusion with regard to entry dates for statutory exclusions in method #1. If you must enter no later than the later of the first day of the plan year or six months after completion of 12 months, then entry dates of 1-1 and 7-1 are not necessarily required.

#13 Richard Anderson

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Posted 25 January 2001 - 02:32 PM

You would have to word the plan entry so that the person enters the plan on the earlier of the first day of the next plan year or six months after becoming eligible. Using just six months after meeting eligibility will not satisfy 410a4.

#14 rcline46

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Posted 25 January 2001 - 04:46 PM

We are not the first to discover the regulation leaves much to the imagination!

As Tom Poje was trying to point out, if a person is required to be a participant (statutorially included!) can you exclude them from the test as statutorially excludible?

It is my belief that the IRS would not approve anything like 6 mos after 1 yos or any variation thereof. Just like they won't approve anything that looks like part-time exclusion. A LOD is acceptable proof I am wrong.

My position is that once the latest possible entry date has passed for an employee, they cannot be statutorially excluded. Jim & Dick want it to be first entry date.

#15 Bob R

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Posted 27 January 2001 - 10:23 PM

Based on the language in the regulations, I think the plan entry dates should be used in determining who is statutorily excludable.

But, I understand the argument supporing the use of statutory entry dates. If this position is taken, you must first decide what the statutory entry dates are. The previous messages correctly point out that it is the earlier of the first day of the plan year or six months following satisfaction of the min age/service conditions.

For a calendar year, 1/1 and 7/1 are NOT statutory entry dates. These satisfy the statute because they are more liberal than the maximum that could be imposed. Under the statute there would be around 183 entry dates (Jan. 1 or six months after completing age/service if the requirements are met between 1/1 and 6/30). 1/1 and 7/1 entry dates are only used because of adminstrative ease - not because they are mandated.

My point is that if you think (which I don't) that the statutory entry dates can be used, does this mean you can use any entry dates you want as long as they satisfy the maximum permitted by the statute?

One other issue -- for a 401(k) plan, regardless of which entry date you use, if someone is only excludable for part of a year, are they included for the entire year or do you split the deferrals and comp? In other words, if someone is no longer excludable on 7/1, is the ADP test based on deferrals and comp from 7/1 - 12/31 or is it based on the full year?

#16 Richard Anderson

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Posted 28 January 2001 - 02:45 PM

Bob R
I don't think that you can exclude someone for part of the year. If they are excludable up to 12/28, for example, but at 12/29 are no longer excludable; then they are not excludable for any part of the year.

Do you have any reason to believe that comp and deferrals may be excluded for part of a year (ignoring of course, that excluding comp before participation may be provided for)?

#17 Earl

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Posted 29 January 2001 - 12:49 AM

My vote is for 21 & 1 and use of the document entry dates. As I understand it the available technique is to apply the 'most stringent eligibility' requirements under law. I think there is a distinction between eligibility and entry. I don't think it says 'most stringent eligibility' requirements under law and 'most delayed permissable entry dates'.

#18 Tom Poje

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Posted 29 January 2001 - 07:28 AM

Bob R:
in regards to which comp to use (date of entry or full year) follow your document. it should be fairly clear.
(Corbel's you have an option when setting up the document - one of the options for 414(s) is 'in the first year of participation, comp is from date of participation')
I think you correctly point out that under the statutory rules you could have 183 entry dates, and therefore, for ease and convience plan use 2 entry dates of 1/1 and 7/1. can you imagine trying to obtain comp from date of participation.

#19 TPApril

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Posted 13 December 2011 - 06:30 PM

10 years later on this thread.....when i've done Otherwise Excludable testing for a plan with monthly entry dates, i've always included NHCE's if their entry date following their 1 year anniversary fell within the plan year. Now I'm looking at a calendar year plan with 3 months elapsed time for entry. For 2010, plan's prior tpa excluded any NHCE who was hired after 7/1/09, treating them as excludable until 1/1/11. I'm just new to looking at this approach, is this the current best practice?

#20 Tom Poje

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Posted 14 December 2011 - 07:27 AM

even amongst IRS officials (at least those I've heard at different conferences) there is some disagreement.
some hold if the plan has entry dates specified (e.g. monthly) then those kick in after the otherwise excludedable person has satisfied a 1 year wait.
some hold exclude for 1 year and bring in 1/1 or 7/1 (assuming an annual plan)
others hold the max exclusion, which is first day of plan year or 6 months after completion of 1 year.

they always promised further clarification but I've never heard anything further. I haven't even heard the issue discussed for a few years .
not sure how different softwares handle it.

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


#21 GMK

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Posted 14 December 2011 - 09:08 AM

Wow. Nearly 11 years from post 18 (Jan. 2001) to post 20 (Dec. 2011), and one sees almost no change in Mr. Poje's youthful appearance and glowing green complexion (until next month, I suppose).

We are impressed. :shades:

#22 ESOP Guy

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Posted 14 December 2011 - 10:13 AM

TPApril

The other way of putting it the method you have historically used is the more (maybe most) conservative method—and thus most safe from being challenged by the government.

The prior TPA appears to be using one of the more (maybe most) aggressive methods that could be more open to challenge. This method will tend to show the test as passing more often than the method you used.

At this point the question becomes how much risk are you willing to lead your client towards?



Good one GMK

#23 Tom Poje

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Posted 14 December 2011 - 10:29 AM

GMK:

Bah - Humbug. You'll be one of the first houses I hit this year.
better yet, I'll get my buddy Santa Robot to pay you a vist.


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


#24 TPApril

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Posted 14 December 2011 - 02:17 PM

Tom & ESOPguy - thanks for your replies. Definitely prefer the more conservative approach. However, what if such approach actually produced better adp test results? Would you stick with that, or check the other approach first? (could potentially happen with this firm due to its smaller size and the make up of the new hires)

#25 TPApril

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Posted 19 December 2011 - 09:05 PM

maybe with the end of the year here i'm not focusing, but i cant recall how to put into practice inclusion of a participant who reached the 1 year (& 21) service when we are not defaulting them to the dual entry date within 6 months.

example for plan with 401(k) eligibility on 1st of month after hire:

DOH-9/15/10
DOE-10/1/10

Was excluded from 2010 ADP test as otherwise excludable.

For 2011 testing, will include, but which pay/401(k) amounts do we include:

a) Full year since including in the test and participated for the full year

b) 10/1/11 - 12/31/11 since that is the period that is not being treated as otherwise excludable