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Person with comp but zero ELIGIBLE comp in ADP test?


BG5150
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I can try firing the question past the IRS agents just to see what they say when I see then in a couple weeks for the Q and A review.

.......

my nonsensical logic operates something like this:

Person A in reality consists of Person A (commission) and Person A (noncommission)

the regs require me to aggregate so normally I only think of this guy as Person A.

however, the plan excludes commission employees.

Therefore I am left with Person A (noncommission) and this particular year he has no comp.

In the past the IRS has said exclude such people from the test (nothing in the regs, simply that for all purposes the person was ineligible to defer so don't include him.

but that is my illogic. probably not even worth 2 cents.

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If this person is commission only, and is not eligible for any bonus or other compensation, I wonder if the IRS would take the position that the exclusion of commissions from compensation is, in effect, an exclusion of this employee from the plan just as if he/she had been excluded by job category, and therefore he/she should not be included in the ADP test (i.e., it is tantamount to an exclusion that requires a Section 410(b) minimum coverage test). I tend to agree with BG that this person is eligible to make an election by dint of age/service requirements, and therefore should be in the test, but the IRS might not buy it.

It sure would not hurt to give a commission-only employee an opportunity to elect to defer out of something in order to get around this potential argument (above)--e.g., in future you may want to give this (& other such employees) a small bonus a few times a year, or even just at year end, so they will have some compensation from which to defer (say $2,000) and therefore clearly can be included in the ADP test (at some very small %, like $2,000/$160,000 of 414(s) comp.).

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I agree with that conclusion as well - if he is not eligible to defer, he cannot be in the test.

Thing he IS eligible to defer. It's just that he has nothing to defer from.

Is this what they call a paradox?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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No, a paradox is 0/0!! :P

You're certainly technically correct that he's eligible to defer, if by that you mean that he has met the plan's age and service requirements and has not been specifically excluded from coverage. I just wonder if it's really nothing more than form over substance (i.e., in effect you've really excluded this person from the plan entirely by defining compensation such that he will have nothing from which to defer even if he makes an election).

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I can respect the conclusion as it as been a subject of debate in the industry since I entered many years ago.

For consistency, in this instance, you should be sure your 410(b) test is properly adjusted to show him as not benefiting for ADP.

You wouldn't want him included as benefiting for ADP but then not have him included in the ADP test; that wouln't be consistent.

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Isn't the question whether he is eligible participate rather than whether he can defer ? It seems like 2 clearly different issues to me. You can't decide deferral issues until participation is first resolved.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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The suggestion seems to be that this individual is not an eligible employee as a result of not receiving any compensation from which deferrals can be made (even though he/she meets age & service requirements), and therefore is not considered to be benefiting under the plan. That certainly is an arguable position. (See Treas. Reg. Sections 1.410(b)-3(a)(2)(i) & 1.401(K)-6.) Therefore, under that theory, this individual will be taken into account under Section 410(b) as not benefiting under the plan, and will not be included in the ADP test.

In this instance, apparently, that may result in failure of the ADP test (see post #25).

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  • 3 weeks later...

this one developed into a lively discussion (we had the IRS Q and A pre-discussion meeting this past Friday, with no real answer being provided, but a promise from the IRS personel to look into the matter and get back to us. (the leanings seemed to be in the direction of including the indiviudal as a 0, but...)

one point that was raised was what if the individual had indicated the desire to defer 25% on any pay that was not commission and this was simply a year he had no other pay. then what % would you use.

ha, a nasty vicious circle.

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We took the aggressive approach and included him in the test. Reasoning:

1. He was eligible to defer.

2. Definition of ADR is deferrals divided by comp used in ADP test.

For the ADP test, we used full comp for everyone.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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1.401(k)-2(a)(3)(i) :

The last sentence states "If no elective contributions, qualified nonelective contributions, or qualified matching contributions are taken into account under this section with respect to an eligible employee for the year, the ADR of the employee is zero."

The argument is, and has always been, what is an 'eligible employee' for ADP purposes. I typically maintain that this is made without regard to 'eligible compensation', but this is the basis of the disagreements.

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The ADP test is designed to gauge the use (HCE vis-a-vis NHCE) by those eligible to make elective deferrals. One who has met the plan's 'eligibility' rules, but has no eligible compensation to defer is foreclosed from the opportunity to defer. So including that person in the ADP test as a zero distorts the results of what the ADP test was originally designed to gauge. So I would hope the IRS would come down on the side of excluding such individual from the ADP testing.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 7 months later...

Sorry to be so late to the party. A lively thread, for sure.

I have an owner and wife (100%) who last took compensation ($45k and $25k) in 2005. No comp since, though still active in the business; hiring, firing, budgeting, etc. One is the Trustee. They've never deferred.

Regardless of comp, they're HCEs. But are they in the ADP test?

The company has gone from 50+ employees to 4. The remaining HCE (by virtue of 2008 wages) is curious about limitations on her deferrals for 2009 (current year testing).

I suppose owners could take a meaningless W2 wage and end the discussion. Whose call is that?

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I would say not in test because there was no compensation whatsoever.

In my example the person had compensation, it just wasn't eligible for deferrals.

BTW: At the ASPPA conference last year, the question was addressed and the answer was to include my guy with zero salary. (I know it's not an official answer, but more than we had int he past.)

To the OP: is this a sole-prop, partnership or corp? If not a corp, I don't see how W2 could be paid. ANd are we talking about '08 or '09?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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  • 1 year later...
Guest Not such a bad guy

three problems

when considering a person compensation as an HCE or they must use 415©(3) definition of comp, as required by 414(q). So his commision would have to be considered, even if it is only commissions (see 1.415©(2)(d)(2).

Also a EE has to be considered for the ADP if they are ELIGIBLE to defer under the CODA, not just if they are deferring, so there ACR must be included in the ADP for wither the HCE or NHCE group, this includes anybody under suspension for hardship distributions.

As of the 2008 cum list elective deferrals (not the match) must be made in relation to a persons 415©(3) comp, which again can not exclude commisions, so they may be denying the particpant their right to make elective deferrals in violation of the terms of the plan doc.

hope this helps

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three problems

when considering a person compensation as an HCE or they must use 415©(3) definition of comp, as required by 414(q). So his commision would have to be considered, even if it is only commissions (see 1.415©(2)(d)(2).

Also a EE has to be considered for the ADP if they are ELIGIBLE to defer under the CODA, not just if they are deferring, so there ACR must be included in the ADP for wither the HCE or NHCE group, this includes anybody under suspension for hardship distributions.

As of the 2008 cum list elective deferrals (not the match) must be made in relation to a persons 415©(3) comp, which again can not exclude commisions, so they may be denying the particpant their right to make elective deferrals in violation of the terms of the plan doc.

hope this helps

I agree with "not such a bad guy".

My two cents.

"Great thoughts reduced to practice become great acts." William Hazlitt

CPC, QPA, QKA, ERPA, APA

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