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Is this exclusion of NHCEs for ADP test legitimate?


Guest 410b
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Oh, boy, you are gonna love this....... yes, you are allowed to put the HCE into the otherwise excludable group. However, there is a special rule, solely for testing the HCE deferrals against the NHCE deferrals which ALLOWS you (but does not require you to) aggregate the otherwise excludable HCE with the non-otherwise excludable group.

Are we having fun, yet?

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Guest 410b

Tons of fun!

I think I should have phrased my last question to be low contributing, not low paid. If I have a low contributing family member, it would be best to have them in with the non-otherwise excludable HCEs?

And if they have a high contribution percentage, it would be best to have them in the otherwise excludable separate test, if that test can pass with them in it?

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Off the thread topic a bit, but your response triggered another question.

I thought I had seen a thread/message/comment somewhere while searching that indicated that you weren't allowed to put any HCE's in the otherwise excludable test group.

So

Are you allowed to put an under 21 HCE in the otherwise excludable test group?

Yes, you are allowed. In fact, it is the default. With the exception of the allowable alternative testing method mentioned in my last post, any HCE which would be otherwise excludable falls into the otherwise excludable group. If, when you test your otherwise excludables, it fails because of the HCE (or HCE's) included, you either invoke the alternative mentioned or you abandon testing your population as two separate groups.

If you have a low paid under 21 family member type HCE, wouldn't it be advantageous to have them in the HCE group?

First, you are continuing your confusion about what it means to be otherwise excludable. It isn't "the HCE group" that you exclude them from, it is the entire testing population that you exclude them from.

So, it depends on whether said under 21 family member has deferred. If they made 2000 and deferred 1900 (not an uncommon thing) then it is usually best to have them remain otherwise excludable, have the test on the otherwise excludable fail and then refund this poor young person's deferrals. Otherwise, if the alternative mentioned in my last message is invoked or if the plan is tested as a whole (without segregating the plan into two populations) this individual's deferral percentage will no doubt cause the test to fail. And even worse, since refunds are based on "he or she who deferred the most", this individual will no doubt be allowed to leave all of their deferrals in the plan, while an older HCE who deferred more (such as the $15.5k limit) will suffer a refund when there might not be a refund to this individual at all if the plan were tested based on otherwise excludable/not otherwise excludable.

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Tons of fun!

I think I should have phrased my last question to be low contributing, not low paid. If I have a low contributing family member, it would be best to have them in with the non-otherwise excludable HCEs?

Indeed, and that is the alternative mentioned in my now second previous message.

And if they have a high contribution percentage, it would be best to have them in the otherwise excludable separate test, if that test can pass with them in it?

Whether or not the test can pass! If it passes, of course. But even if it doesn't, the "damage" is usually less.

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Guest 410b

A "for instance" of what I was trying to express with the HCE comment.

Say a company has 3 HCEs due to ownership and/or compensation. Then there is a 4th under 21 HCE who is an HCE only because of family relationship to one of the first 3. I was understanding your special rule comment to say that I could, if I wished, include the 4th under 21 HCE in the main HCE group to be tested against the non-otherwise excludable NHCEs.

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A "for instance" of what I was trying to express with the HCE comment.

Say a company has 3 HCEs due to ownership and/or compensation. Then there is a 4th under 21 HCE who is an HCE only because of family relationship to one of the first 3. I was understanding your special rule comment to say that I could, if I wished, include the 4th under 21 HCE in the main HCE group to be tested against the non-otherwise excludable NHCEs.

Yup, you could. See Code Section 401(k)(3)(F).

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Guest 410b

In regard to the side issues:

Under 21 HCE family members. Thanks for the comments on that issued. I had something in mind, but after checking the facts I don't think the definition of child will stretch far enough in this area of the code to cover my situation.

Monthly entry date / Quarterly enrollment date issue.

I did finally bring this up Friday. I was pointed to another document in the drawer.

Company Name

Prototype Defined Contribution Plan

Adoption Agreement

I was directed to a section on pay reduction agreements. The first sentence in that section, prior to a statement and choice selection about subsequent pay reduction agreements, reads:

"The initial pay reduction agreement made by a Participant may be effective as soon as administratively practicable after his/her initial Entry Date."

And I was then asked what is the time for "... as soon as administratively practicable ..." ?

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And I think you will find that the DOL has been fairly rigid in their interpretation. Whether the IRS would adhere to the DOL's interpretation is not known to me, but I would suggest that an actual entry date of Mar 1 and an effective entry date of two months later won't cut the mustard.

The DOL has been, to put it mildly, on a rampage of late (the last few years) to "encourage" (through the use of excise taxes and audits) employers to ensure deferrals are forwarded to the plan within a very short period of time after those deferrals are withheld from paychecks. Language similar to the "as soon as administratively practical" language you cite has been interpreted to mean as little as two or three days. Lately, the DOL has come out with a proposed regulation that loosens that a bit, but two months would never have met their definition.

Yes, I recognize that there is a subtle difference between the issues being discussed. In the case of the DOL example we are talking about already withheld monies; in your case we are talking about the timing of when the first monies will be withheld.

I still suggest you highlight this issue to ERISA counsel and listen carefully to the response.

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Guest 410b

Trying again:

There is a confusion here. Maybe more than one. Maybe more than two.

I wonder if one of the confusions is between terms and dates involving a service requirement and terms and dates involving a participation requirement.

Here is an example of the situation:

My plan is NOT more liberal than the statute in regard to service requirements. It equals the plan. Therefore I don't think it is correct to do "carve out' based on a service requirement.

Ah, but your service eligibility IS more liberal because of the entry dates. You could have entry 6 months after satifying the 1 year of service requirement. You have monthly (or quarterly) entry dates. Does what everyone is saying make more sense now?

For testing purposes there are two testing classes in my company’s participant population. There is an age-based class and a service-based class. There is also a participation rule which may (or may not) be interpreted and used in conjunction with the age-based class and/or the service-based class for segregating the testing population.

We are more generous than the minimum code requirement for age. This creates a group of age related otherwise excludable participants in our population. We are allowed to split the age-based class into two groups for discrimination testing. Much of the discussion in this thread has been about grey areas in regard to plan entry dates for testing purposes. Our plan is more generous than the minimum code requirement for entry/participation date, so based on the experience of others who have posted in this thread, we have an option for following the plan or IRS guidelines for separation of age-based otherwise excludable participants. If we follow the IRS guidelines, we will have more otherwise excludable or non-statutory participants than we see when we look only at the plan guidelines.

Although we are more generous than the minimum code requirement in regard to plan entry/participation, we are NOT more generous than the minimum code requirement for service. We match the minimum code requirement for service. There is only 1 plan in the company. All employees who have not met the service requirement are excluded from participation in the plan. While there are plan participants who have received more generous treatment than the code requirements for plan entry, there are no service-based otherwise excludable plan participants. Since there are no otherwise excludable service-based participants to segregate, a discussion about the proper method to segregate them for discrimination testing purposes is irrelevant. Testing on our plan that has attempted to exclude them is incorrect because it leaves us with an incorrectly computed HCE contribution limit.

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Guest 410b

Does a monthly submittal of withheld monies work in relation to your interpretations of current DOL attitudes?

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You are free to resolve the ambiguities the way you have described, because you are the client and have been made aware of the ambiguities. In addition, nobody can claim that your descriptions aren't faithful to the English language equivalents.

However, please don't imply that others who have resolved the ambiguities differently, based on representations from IRS personnel, aren't also entitled to their positions.

I believe that you will be able to find court cases that have held that when official guidance is lacking and a plan sponsor resolves an ambiguity in a manner which is consistent with positions taken publicly by IRS personnel, that the plan sponsor's position is not unreasonable.

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Guest 410b

Fair enough.

I am still uncertain if any of the answers I have gotten have come from someone who has had or is aware of another plan that does not have otherwise excludable service based employees applying the techniques discussed in this thread. I guess that's on me to figure out. I do have a much better understanding of the basis for applying the participation/entry date rules when otherwise excludable employees exist. I will be in a listening position sometime in the next few days while my opinions are critiqued by the testing company to the plan administrator. If I am allowed to comment, I will be able to do so in a much more informed manner than I would have been able to do a few days ago.

I cannot find the 410 reg online so that will need a library trip. I do intend to do that at some point, it is just a matter of figuring out where and then when is convenient.

I really appreciate the time that all the people who have responded have taken to read posts and give answers. It has been very helpful to me. I don't know where else I could have gotten this kind of help.

Regards,

410b

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Does a monthly submittal of withheld monies work in relation to your interpretations of current DOL attitudes?
Probably not. I think there is a proposed reg on the table that loosens their current stance (which is more akin to 1 or 2 days in most circumstance than anything else) to one week.
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Guest 410b

Mike Moderator issue,

I was rereading some of the posts. One thing I wondered about,

could you check, roughly in the middle of post 19 and see if it shouldn't be 410(b)(4)(B) and ©, fix there if necessary, and then delete this post?

Thanks.

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Guest 410b

Hi BG5150,

Thank you. I had found the Cornell stuff and had that 410 to look at. It is different than the references in the post Mike made.

I am not clear on the distinction between regulations and code, but I think I am supposed to be looking for a regulation.

Here is what Mike wanted me to read:

The definition of "otherwise excludable" is found in the regulations under IRS Section 410(b). You might want to find Regulation Section 1.410(b)-6 and read it. It is kind of long, so I won't repeat it here, but it is entitled "Excludable employees".

I don't remember precisely where now, but I had found online reference to what I think he was referring to in some library of congress related site, but the parts around that 410 number would not come up on my screen.

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Try this.

http://ecfr.gpoaccess.gov/cgi/t/text/text-...26/26tab_02.tpl

The regulations "clarify" the Code sections. I use that term loosely. IRC 401(a)(4) says that plans cannot be discriminatory. Printing the regulations that "clarify" this (1.401(a)(4)) caused the destruction of bajillions of trees (more or less) for the paper, and the regulations spawned whole industries relating to interpretation and compliance. Who could have forseen the horror that awaited us.

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Guest 410b

Regulation 1.410(b)-6

(b) minimum age and service exclusions

(3) Plans benefiting certain otherwise excludable employees

(ii) Testing portion of plan benefiting otherwise excludable employees

In determining whether the plan that benefits employees who would otherwise be excludable under paragraph (b)(1) of this section (applied without regard to section 410(a)(1)(B)) satisfies section 410(b) and §1.410(b)–2, employees who have satisfied the greatest permissible minimum age and service conditions with respect to the plan are excludable employees. In addition, if the plan being tested applies minimum age and service conditions and those conditions are less than the maximum permissible minimum age and service conditions, employees who have not satisfied the lower minimum age and service conditions actually provided for in the plan are excludable employees.

That appears to me to say that plan participation dates are the basis for picking the otherwise excludable employees. If they are short of the plan participation date, they are not plan participants. If they are beyond the greatest permissible minimum age and service conditions based on plan related dates, they must be included in the main test.

So this employee/participant was not a participant based on the semi-annual entry date approach (fiscal year plan):

Sample for one of the 35 reclassed due to DOH After 11/1/05.

NAME1. DOB APRIL 1954. DOH 11/14/2005. ENTRY DATE 12/01/2006. Disaggregated due to service of less than one year.

But in reference to the plan I think he/she had met the greatest permissible age and service conditions and would not be allowed to be an otherwise excludable employee according to the regulation.

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You may be wrong, buy you may be right (with apologies to Billy Joel).

There are others who read it entirely differently.

Keep in mind that the paragraph you are quoting is attempting to define a double exclusion. Those who are "under" are excluded and those who are "over" are excluded: only those who are neither under nor over are considered as part of the plan being tested in that paragraph.

The problem, I suppose, is due to the language that the IRS uses. Let's see if I have this right:

1) we want to test those who are defined in the regs as "otherwise excludable" as a separate population.

2) to do that we pretend that those who are otherwise excludable are actually includable (which allows the IRS to not re-write any of the regulations that reference includables). But the code and regs don't actually define includable. Includable is really the entire population reduced by those who are otherwise excludable. So the IRS turns the whole world on its head and redefines who are otherwise excludable just so you can test the real otherwise excludables as includables. I *know* we are having fun now! Right? RIGHT?????

3) the language for determining, in this circumstance, the otherwise excludables defines two groups: a) those who are so young or who have so little service that they have not yet become participants in the plan, per the plan's actual rules. This is the group defined by the last sentence of what you quoted ("In addition, if the plan being tested applies minimum age and service conditions and those conditions are less than the maximum permissible minimum age and service conditions, employees who have not satisfied the lower minimum age and service conditions **ACTUALLY PROVIDED FOR IN THE PLAN*** are excludable employees."). b) those who have so much service and are so old as to be participants in the plan if the rules were applied to: "employees who have satisfied the greatest ***PERMISSABLE*** minimum age and service conditions with respect to the plan are excludable employees."

Note the difference in language. In the first group, the really young or short service group must be determined using the "conditions" that reference the actual provisions of the plan. The second group (what I usually call the BIG group) is determined using the greatest permissible provisions; not the actual plan's provisions.

At issue, of course, is whether the period of time "waiting for the next entry date to roll around after an employee has established the age/service requirements under the plan" can be part and parcel of the "greatest ***PERMISSABLE*** minimum age and service conditions with respect to the plan".

I say yes, you say no. There are those at the IRS that will line up behind you, and there are those at the IRS that will line up behind me.

Does the language of 410(a)(4) help any: "TIME OF PARTICIPATION: A plan shall be treated as not meeting the requirements of paragraph (1) unless it provides that any employee who has satisfied the minimum age and service requirements specified in such paragraph, and who is otherwse entitled to participate in the plan, commences participation in the plan no later than the earlier of (A) the first day of the first plan year beginning after the date on which such employee satisfied such requirements, or (B) the date 6 months after the date on which he satisfed such requirements, unless such employee was separated from the service before the date referred to in subparagraph (A) or (B), whichever is applicable."

I'll let others carry the ball from here, I'm afraid, unless some time opens up that I'm not expecting.

Good luck.

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Guest 410b

So I have either made a clear point ambiguously or an ambiguous point clearly.

(Or am ambiguously supporting an ambiguous point.)

Again I appreciate the time you have taken to review and respond to my posts.

1). I agree.

2). I partially agree.

I don’t believe the IRS “redefines” who is otherwise excludable. I think that the IRS “defines” otherwise excludable by defining the methods to separate the employee population into three groups; employees who are non-participants in the plan, employees who are statutory participants in the plan, and employees who are otherwise excludable or non-statutory participants in the plan. Once that is done, the employer knows who in the participant population is allowed to be in the disaggregated testing group (ie, as you said, test the real otherwise excludables as includables). All other plan participants must be in the BIG group.

3). Two groups, see comment above.

b) those who have so much service and are so old as to be participants in the plan if the rules were applied to: "employees who have satisfied the greatest ***PERMISSABLE*** minimum age and service conditions with respect to the plan are excludable employees."

Note the difference in language. In the first group, the really young or short service group must be determined using the "conditions" that reference the actual provisions of the plan. The second group (what I usually call the BIG group) is determined using the greatest permissible provisions; not the actual plan's provisions.

I disagree with the last sentence.

In post 19 above, this:

employees with repsect to the plan

Was allowed to describe a relationship between employees and the plan.

In post 45 above, this:

"employees … with respect to the plan

Is not allowed to describe a relationship between employees and the plan.

It can’t go both ways.

The BIG group is determined by reference both to the code (i.e. greatest permissible provisions for age and length of service) and to the plan (for the time of participation). “With respect to the plan” is indicating a look to the plan, not the statutory provisions, for the time of participation.

At issue, of course, is whether the period of time "waiting for the next entry date to roll around after an employee has established the age/service requirements under the plan" can be part and parcel of the "greatest ***PERMISSABLE*** minimum age and service conditions with respect to the plan".

I disagree.

In response to a previous post of mine, I believe you pointed out that 410(b)(4)(b) and 410(b)(4)© must be taken together to define both “completion of period of service requirements” and “participation date requirements” for otherwise excludable participants. I believe this means that a wait for a next entry date is part of the process for determining the otherwise excludable/non-statutory participants.

Re 410(a)(4). This defines the greatest permissible elapsed time between the employee’s completion of the period of service defined in 410(a)(1) and the employee’s commencement of participation in the plan.

I see the issue being “what is the proper participation date to use?”. My opinion is that the “with respect to the plan” language of 1.410(b)-6 indicates that this statutory participation time is not allowed to be used in the determination of otherwise excludable employees.

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410b, I fully understand you wanting to know the details, but don't you think it wise to take the advice of pension professionals who KNOW this stuff inside and out, rather than thinking you have solved this issue on your own? Listen to Mike (and others) or don't listen, but stop beating a dead horse.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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As I said, 410b may be right. Technically. Even though I don't think he is, that means very little in the long run.

I am reminded of the story of 1.401a-20 which includes the requirement that the QJSA be the most valuable benefit. Now, it used to be that 1.401a-20 said merely that. I read it faithfully and opined that it meant we must offer lump sums that were not more valuable than the QJSA offerred. Sounds simple, right? Wrong. The IRS modified the reg and stated that what they had meant to write that the QJSA requirement applied to everything except lump sums determined under 417(e). Retroactively. Why? Because, in part, that is what their reps had been saying at various conferences. There is no question but that my reading was correct and the IRS announcement applying the "correction" retroactively supports my reading as having been accuate. But there are those who did it "wrong" for many a year who were found to have "done it right" by a stroke of the pen. I should point out that many thought my position was incorrect when I voiced it (even here on BenefitsLink, if I recall). Now, it turns out that it was merely "the conservative view."

Certainly, 410b is free to take the conservative view, because the language is interpreted by him to be as clear as my reading of 1.401a-20 was to me. And even if the IRS comes out and clarifies it someday and proves him "wrong", it is hard to imagine the IRS beating him up for doing so.

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My whole issue with 410b is not whether or not his/her position is wrong, it's the fact that he/she is stating the other methodology is wrong. Sorry, it just rubs me wrong to see that sort of hubris (or ignorance). Mike, you have presented a sound reasoning for why the other position is plausible and the methodology many use.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Guest 410b

Blinky,

I saw reference to the 3 eyed fish in another thread about avatars and wondered what it looked like. Now I know.

I guess I am not sure if I have been beating a dead horse or not, but that idea implies to me, a fairly narrow focus as to what has been going on here. This thread has been of great benefit to me and I wanted to try and express some of the things that I see.

First, among other things, I am capable of being both hasty and inflammatory. As I have started to see more about how complex the issues are, I have tried to moderate that presentation. The comments Mike made about "critical" indicate I probably have not been successful. Again, I am not sure how successful I was, but in the last post I made, I worked hard to try to say things to the effect that I thought or I disagreed or I would interpret differently rather than stuff like you are wrong. I think that one of the conclusions I am drawing from the thread as a whole is that I did not ask my initial question(s) correctly.

There is no way that I can make any effort on this site as an exchange for information received. The best I can do is to say that since I have asked questions here and others have taken the time to answer them, even though my initial response is heated disagreement, I have an obligation to work to understand what they are saying to me and why they are saying it. That has been a very interesting process which has again reminded me about hastiness and forced me to think hard about what hidden assumptions I have made in approaching the issues. It has forced me to think about what I think is the right approach and work to find the words and sentences to express those ideas and incorporate the responses of others into that process.

I have learned about the basic justification reasons our plan tester will probably use to justify their approach to the testing.

While he has not said so specifically, I think that Mike thinks my approach is incorrect. He has however indicated that it might be correct, which means to me that it has some defensibility. There are some company specific reasons, which are not appropriate for me to be posting here, as to why I think we should consider a more conservative approach. Mike's responses help me to believe that that is not a totally irrational concept.

I have also gotten reference links to both the code and the regulations. I have learned the term otherwise excludable employees and that testing with them in a separate group is an industry standard practice. I have seen some thread responders that presented each of the two sides of the issue.

Most helpful.

Regards.

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