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(a)(4) testing of excluded employee


KCA

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If a cross-tested profit sharing plan is written to exclude a group of employees such as associate attorneys, non-shareholder physicians or even an individual by name, those employees will not be eligible to participate once they meet the plan’s other eligibility requirements such as age and service. Therefore, they will not need to receive a top-heavy MB if they are non-keys, they will not receive a safe harbor contribution (if SH plan) and will not need to receive a minimum gateway since they are not receiving an employer contribution.

Questions:

1. They must be included in 410(b) coverage testing as non-excludable, not benefiting; correct?

2. Assuming that coverage testing is passed with those employees not benefiting:

a) Must they be included in 401(a)(4) testing with a zero contribution?

b) If no, can they be included in (a)(4) testing with a zero contribution?

c) Do the answers to a or b change if employee is an HCE or NHCE?

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to make clear, since the plan could be a 401k with a match

coverage:

401k - includable, not benefiting

NOT on ADP test as that includes only those eligible to defer

401m - includable, not benefiting

NOT on ACP test (this is no different than if you had a last day or hours requirement

401(a)(4) [nonelective] - includable not benefiting

nondiscrim - show up with a big fat 0

if they terminate with less than 500 hours they still are includable and not benefiting. the rule of excluding non benefitting terminees with less than 500 hours only applies to 'participants'. these people never get to that stage.

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Thank you both. That is what I have always done but I was recently told that if 410(b) coverage is passed with them includable not benefiting then I do not need to include them in 401(a)(4) testing at all.

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if it helps, here are some IRS notes, in particular see page 73 regarding rate group testing.
as the notes say:
Once the rate groups are determined, each rate group must satisfy coverage (in other words, you now go back to the coverage rules)

To determine whether the rate group satisfies 410(b), the rate group must take into account all nonexcludable employees regardless of whether they benefit under the plan.


under coverage, the 1.410(b)-6 lists the possible 'excludable employees'

in particular (f) (i) employee does not benefit
(ii) employee is eligible to participate [thus someone who is excludable by class and has met age 21/1 year svc would not meet this criteria because they were never able to participate]
(iii) fails min hrs or last day
(iv) fails to benefit [because of hrs/ last day]
(v) terminates with less than 501 hours

coverage and nondiscrim - govt.pdf

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