Jump to content

1600 hour service requirement?


kmhaab

Recommended Posts

Is there any permissible situation where a 401(k) can exclude employees that work less than 1,600 hours in a year? 

I am well aware of the IRS guidance on excluding part-time employees that work less than 1,000 hours, but I am so flabbergasted to see a 1,600 hour participation requirement  in a plan restated in 2018 that I feel I must be missing something...? 

 

 

 

Link to comment
Share on other sites

This might work:  Participants expected to work less than 1,600 hours in a plan year are excluded from the Plan.  Regardless, if any such participant is actually credited with 1,000 hours in their first 12 months of employment or any calendar year, then they are eligible after that computation period. 

So they are not eligible immediately, as would a 1,600 hour employee, but they are eligible after a year, thus satisfying 410(a).

Do I win???

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

kmhaab, is the plan stated as an "individually-designed plan" or using a preapproved document?

If a preapproved document, was the provision you observed within the parameters the adoption-agreement form allows?

 

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Peter - It is a pre-approved document, but added in the exclusions section under "Other employees."  

Again, I'm flabbergasted that a TPA included this in the plan document when it was restated last year. I assume there's no recourse against the TPA? I haven't see the service agreement yet,  but they usually disclaim all responsibility for compliance.

Link to comment
Share on other sites

kmhaab, can you confirm that you're sure what I suggested is not the case? Is the Plan;s eligibility immediate?

Did your client ever let them particpate, or did they always exclude them from the plan on a permanent basis on account of being under 1,600 hours?  My scenario is in fact permissible.

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

19 hours ago, austin3515 said:

This might work:  Participants expected to work less than 1,600 hours in a plan year are excluded from the Plan.  Regardless, if any such participant is actually credited with 1,000 hours in their first 12 months of employment or any calendar year, then they are eligible after that computation period. 

So they are not eligible immediately, as would a 1,600 hour employee, but they are eligible after a year, thus satisfying 410(a).

Do I win???

I think what you are describing is legal but wouldn't the document have to say the 2nd part of your fact pattern.  To be specific that they enter the year following working 1,000 hours.  I guess it could be hidden in the base document but it has to be there some place in order to do what you are suggesting might be the case.  

Link to comment
Share on other sites

Under the rules for a preapproved document, the IRS does not issue an opinion letter for “[p]lans that include blanks or fill-in provisions for the employer to complete, unless the provisions have parameters that preclude the employer from completing the provisions in a manner that could violate the qualification requirements[.]  Rev. Proc. 2017-41 at § 6.03(17).

 

Did the adoption-agreement form include an instruction to constrain what would be proper for the fill-in line the employer used?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

I find it odd that a pre-approved document would allow something like that.

Usually, the choices include "...upon completion of ________ Hours of Service (not to exceed 1,000)..."

QKA, QPA, CPC, ERPA

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

Link to comment
Share on other sites

I spoke too fast - It is a prototype document, but I am not able to confirm whether it was pre-approved yet. Perhaps not.

Austin - Good idea! But based on the way the provisions are written it doesn't work. The document excludes EEs working less than 1600 hours before 

BG5150 & Peter - the adoption agreement includes parameters like BG5150 described above in the sections on eligibility for certain contribution types, i.e. Eligibility for Elective Deferrals, Eligibility for Matching Contributions (completion of ___ hours of service (not to exceed 1,000)...) and the plan is technically compliant here. "Eligible Employees" may begin making contributions after 500 hours in 6 months.   BUT there is a general Exclusions section which states "The term "Eligible Employee" shall not include:" followed by check boxes for union employees, leased employees, non-resident aliens and other employees. After Other Employees is a blank that was filled in with "exclude employees that work less than 1600 hours per plan year."  There is no language with instructions or parameters for the "other employees" fill-in line.  

 

Link to comment
Share on other sites

Have you looked at the base document provisions for eligible employee and excluded employee?  Our VS document has the following language in the section on excluded employees:

Quote

Disguised service conditions. An exclusion of employees by job category may not indirectly impose an impermissible service condition (i.e., a service condition that fails to satisfy the requirements of Code §410(a)). The exclusion of part-time Employees, seasonal Employees, temporary Employees or other job categories may be considered a disguised service condition where such categories are based solely on the amount of service performed by those Employees. A disguised service condition will not violate the minimum service conditions if such Employees are eligible to participate upon completion of a Year of Service. If the Employer excludes Employees under AA §3-1 or under AA §6C-3 of the Profit Sharing/401(k) Plan Adoption Agreement using a disguised service condition, such as part-time or seasonal Employee status, and any such Employee completes a Year of Service, such Employee will no longer be treated as an Excluded Employee.

Language like this would turn what you describe into what Austin describes. 

Link to comment
Share on other sites

So, here’s a related question:

 

How much responsibility ought a third-party administrator, recordkeeper, or other service provider that’s not a law, accounting, or actuarial firm have for guiding a preapproved document’s user to adopt a plan that meets tax-qualification conditions and meets ERISA title I required provisions?

 

Imagine this hypothetical situation.  A TPA licenses from an unaffiliated business preapproved-documents software.  The TPA’s employee drafts, for a user’s approval, an adoption agreement.  The TPA’s employee fills-in information from the user, including about its intent to exclude an employee who works less than 1,600 hours.  The software does not flag that exclusion as even a potential error.  The customer asks no question, and the TPA says nothing, about whether the filled-in text might be inconsistent with IRC § 410(a) or ERISA § 202(a).  (Assume the TPA knows the user has not asked any lawyer, accountant, or actuary to review anything.)

 

Even if a user doesn’t ask, ought the TPA to have some responsibility for warning the user that its desired provision might be legally ineffective under ERISA sections 202(a) and 404(a)(1)(D), or might tax-disqualify the plan.

 

Imagine there is a general warning—perhaps in the TPA’s service agreement, and usually on the preapproved document itself—that no one gives any assurance that the user has properly used the preapproved document to state a tax-qualified plan.

 

Is such a general warning enough?  Or ought a TPA be responsible to call attention to the specific point?

 

Most important, what’s your reasoning for how much or how little responsibility the TPA ought to have?

 

BenefitsLink mavens, what do you think?

 

 

 

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

austin3515, thank you for a clear answer.

 

Do other BenefitsLink mavens have concurring or differing views?

 

My question is less about what current law does, and more about what you feel the responsibility ought to be.

 

And would your answer change if, instead of a TPA’s custom handling, a recordkeeper assembles documents for 100,000 users?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

I'm with Austin on Peter's scenario: I'd say the TPA is to blame. If they want to try to shift some blame downhill to their doc software for not properly validating input, I guess they can give it a shot. I don't think a general warning covers them in any sense here from a "who's to blame" point of view. The TPA should have and should follow documented procedures (senior level review of all plan documents for possible compliance issues) to ensure things like that are caught. If nobody even looked at what the employee entered before it went to the sponsor, that's a big problem.

As a sponsor I'd be very wary of a "general warning" like that in a provider's service agreement... if I'm not paying you to provide me with a compliant document, why am I paying you to draft the document at all? I could just as well Google "401(k) adoption agreement" and fill in the blanks randomly by myself for free.

My answer doesn't change if the recordkeeper is also the document provider, whether they're doing documents for 10 plans or 100,000. If your QA processes don't scale with the volume of work you're doing, that's not the customers' problem. (I believe there probably IS a significant gap between what the document says and what the plan administrator thinks it says, on a lot of the plans of the kind you're talking about, Peter... but of course that's a separate issue!)

Link to comment
Share on other sites

15 hours ago, JackS said:

Kevin C, which document is that?

We use ASC documents.  While this provision would prevent the document from violating 410(a), I'm not sure it prevents you from losing reliance on the opinion letter because the adoption agreement was completed incorrectly. (Rev. Proc. 2017-41, Section 7.03 (3) & (4))

Most TPA's include a recommendation that plan documents be reviewed by counsel before signing.   That might make it more difficult to pin the blame on them in court. Would a TPA claiming that the plan document is in compliance be considered practicing law?

If the TPA has people with credentials, every professional organization should have in their by-laws that you will not do work you are not qualified to do.   I know in practice that gets ignored as much as the speed limit signs in Texas, but it should be in the by-laws.  One of our local competitors had their receptionist prepare their restatements and amendments.  In our office, I either prepare or review every amendment and restatement.  Most employers probably wouldn't appreciate the difference. Our clients do.

I would place the blame on those involved in the document preparation, regardless of how many documents they prepare. If you are going to do it, do it right.

Link to comment
Share on other sites

If anyone is wondering, I have for many years expressed my belief that any person should be free to give legal advice, and to bear responsibility for her advice.

 

And in an IRS TE/GE conference a few years ago, I suggested (in response to an IRS speaker’s question about what the IRS could do to help plans comply) that the Internal Revenue Service could assert power to treat not only submitters of IRS-preapproved documents but also their licensees’ workers who help users fill-in the documents as engaged in practice before the IRS, subjecting them to the Treasury department’s “Circular 230” rules for that practice.  While not a complete response to the problem, it could be a way to push some document assemblers closer to the practices that commenters here advocate.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

5 hours ago, Tom Poje said:

Perry Mason never loses. 

Well..... almost never.  Perry did lose a few cases.

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.

Link to comment
Share on other sites

Sometimes it amazes me that other people have better ideas than Relius.  This is such an obvious provision.  I wonder if they added it to their newest pre-approved document.

 

Disguised service conditions. An exclusion of employees by job category may not indirectly impose an impermissible service condition (i.e., a service condition that fails to satisfy the requirements of Code §410(a)). The exclusion of part-time Employees, seasonal Employees, temporary Employees or other job categories may be considered a disguised service condition where such categories are based solely on the amount of service performed by those Employees. A disguised service condition will not violate the minimum service conditions if such Employees are eligible to participate upon completion of a Year of Service. If the Employer excludes Employees under AA §3-1 or under AA §6C-3 of the Profit Sharing/401(k) Plan Adoption Agreement using a disguised service condition, such as part-time or seasonal Employee status, and any such Employee completes a Year of Service, such Employee will no longer be treated as an Excluded Employe

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

On ‎2‎/‎15‎/‎2019 at 4:45 PM, austin3515 said:

Sometimes it amazes me that other people have better ideas than Relius.  This is such an obvious provision.  I wonder if they added it to their newest pre-approved document.

 

Disguised service conditions. An exclusion of employees by job category may not indirectly impose an impermissible service condition (i.e., a service condition that fails to satisfy the requirements of Code §410(a)). The exclusion of part-time Employees, seasonal Employees, temporary Employees or other job categories may be considered a disguised service condition where such categories are based solely on the amount of service performed by those Employees. A disguised service condition will not violate the minimum service conditions if such Employees are eligible to participate upon completion of a Year of Service. If the Employer excludes Employees under AA §3-1 or under AA §6C-3 of the Profit Sharing/401(k) Plan Adoption Agreement using a disguised service condition, such as part-time or seasonal Employee status, and any such Employee completes a Year of Service, such Employee will no longer be treated as an Excluded Employe

Austin:  A similar provision is in the current and recently-submitted documents for both FIS (Relius) produced document series:  Corbel and PPD.  They are worded a little differently but have the same effect.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...