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Amendment to Remove Participants?


ERISA1

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A plan's participant count will soon exceed 120. Sponsor wants to avoid Audit requirement.

The plan has immediate participation for purposes of deferrals only. (The plan is not Top Heavy.) Very few participants with less than 1 year of service have signed up to defer. So, the plan has around 80 participants with no account balance.

I know the plan can be amended to add a service requirement of up to 1 year, but Can the Employer amend the plan to remove previously hired "participants" who have not signed up to defer? I recall an IRS ruling in which they permitted an amendment removing participants as long as the amendment doesn't reduce accrued benfits. I can't find that ruling any more. Can anyone provide a citation one way or the other?

Thanks for any feedback.

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A cite isn't necessarily needed as you cannot prove a negative. The issue is that plan participation is not protected under 411(d)(6). Therefore, such a move would NOT be a prohibited cutback. Those without balances would not be participants at the beginning of the new year.

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How many of the employees with less than 1 year of service who are not participating have worked 1,000 hours or more during their initial year of employment? These employees will be counted as participants once they have met the entry requirements. You cannot amend the plan to remove participants who are not deferring if they have met the amended eligibility requirements.

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Another approach would be to split the plan into 2 plans (for different groups of employees). The audit requirements are determiend on an individual plan basis. Of course, there would be the initial cost of establishing the plan, and the annual cost of updating and filing forms 5500, but I would suspect that those additional fees would be much less than the cost to perform an annual plan audit. Also, you probably could pre-arrange with the appropriate parties that normal administrative fees (including assets fees) would not increase and investment availability/returns would not change.

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I disagree with the last post. You can remove someone from participation if they have been there more than 1 year. You can remove everyone except those named Steve if you like. Barring an ADEA violation or one that is a pseudo age/service violation, you can do about anything you want. Of course the applicable coverage and nondiscrimination tests must be passed.

Oops Sieve snuck in, replace last post with last last post.

"What's in the big salad?"

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

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If they were hired in 2008, then the 12 month period for determining the 1000 hours for eligibility will extend beyond January 1, 2009. Hence, they will not be eligible on the first day of the new year.

You do bring up another interesting situation, though. Immediately eligibility simply means that a year of service is not required for eligibility. Most practitioners make the grave error of changing the plan's defininition of a year of service when the plan doesn't require a year of service for eligibility. In all instances, it is best to leave the definition of a year of service at a 12 month period.... 1000 hours. Do not change the definition merely because it is not required for eligibility. That would create a cutback issue as once an employee as attained a year of eligibility service under the plans definition, you cannot amend that away.

I didn't make references to any elapsed time rules. The point is merely not to change the plans definition of a year of service merely because a year of service is not required for eligibility.

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Blinky -- Sorry for sneaking in on ya' . . .

If the only change made to the plan is revising the eligibility standard upwards, then Plan Man is correct that you cannot, therefore, remove from participation those who already have met the amended eligibility requirements. But, if you want to exclude a group of employees (it's usually done by job category) and therefore rely on 410(b) coverage testing, you certainly can prospectively remove anyone from participation, even if they've met the plan's eligibility standards. However, based on what ERISA1 wants to do (stay below 120 to prevent an audit), and based on the fact that he/she really can only remove those who have not already deferred into the plan or otherwise have account balances, it's not likely that a job classification non-eligibility provision will produce the desired result.

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Another approach would be to split the plan into 2 plans (for different groups of employees). The audit requirements are determinend on an individual plan basis. Of course, there would be the initial cost of establishing the plan...

If you do this, don't forget to consider whether any portion of such fees are settlor expenses, to make sure they are not paid by the plan.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Proving a negative is a tough one for sure. Let me see if I can synthesize the replies as follows:

1. I can (clearly) amend the plan so as require a Year of Service prospectively;

2. I can amend the plan to remove any participant who has less than one Year of Service (and has no account balance);

3. I can split the plan in two as long as the plan doesn't pay settlor expenses.

Please let me know if anyone disagrees. Now, a follow up question:

Let's assume I'm now well below 120 participants. Would any one doubt I can amend the plan to say "Non-Owner Physicians are eligible immediately; all others must complete one Year of Service."? The physicians will likely be HCEs within a year or two; but since they can't be HCEs in year one, it seems to be a viable approach. Any disagreements??

Thanks all.

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Regarding #2, you can amend the plan to remove any participant who has less than one Year of Service even if they have an account balance.

Those with account balances will still be counted as partcipants and included in the Form 5500 count but they would no longer be eligible to accrue additional benefits. I would take this approach over only removing those who don't have an account balance.

Laura

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