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They are Key Employees. They own more than 5% of the employer or they own more than 5% of a participating employer.

I thought the same, but Kelsey corrected me, it is "12 month periods" not "plan years" or "consecutive years". Arguably, the "overlapping" periods are still consecutive because there is no period with less than 500 hours in the sequence.

Managing a retirement plan for an employer that has PRN, on call, per diem, gig worker and other similar categories of employees is challenging. Retirement plans have a presumption that the employer knows when an employee is no longer employed by the employer. That is not always the case. Best practice is for the employer should document the criteria that will be used to determine when a termination of employment occurs. This could be in an employment contract, a job description, an employee handbook or other similar written document. For example, an employee could be considered if the employee has not worked for specified time period (e.g., 90 days, a calendar quarter, ...). An employee is considered terminated if the employer communicates to the employee that the employee is considered terminated. An employee is considered if they file for unemployment. These types of policies create bright lines that can help the plan to determine when distributable events occur, to determine eligibility service and vesting service, and potentially apply allocation conditions such as a last day rule. If formal policies are not in place, then decisions such as determining an employee's status under the plan can be contentious. Like most policies, put it in writing, communicate it, and apply it uniformly and consistently.

Joe can go to work for an unrelated company and roll his balance into their plan before 2025. If Joe and Joe's wife's combined ownership drops below 5% and Joe's son is married, Joe's son could transfer his shares to his spouses name. Then Joe would no longer be a 5% owner since you don't double attribute. Or Joe, Joe's wife, and Joe's son can sell off such that Joe no longer owns directly or indirectly more than 5% of the business but continues to work there. So yes there are ways, just probably not the most practical.

Correct. True severance pay is not wages for plan purposes since it is not being paid for your services provided to the employer. Severance pay is an amount being paid to stop working, to be no longer employed, usually in exchange for your signature to agree to something regarding your termination. This is something that is paid after termination and would not have been paid to you if you were still working. Post-severance pay is wages for work that are finally paid after leaving employment. Such as unpaid PTO or your last paycheck or an earned bonus or maybe a commission, etc. Items that would be payable if you kept working.

Check the plan's definitions of: Disability, because the plan's requirements to be considered may be different from the definition was using to make the disability payments. Hours, because the plan may provide for crediting of hours while the participant was considered disabled under the plan. Compensation, because the plan may have rules about whether the payments made by the firm are considered as compensation.

Section 112 of SECURE 1.0 says for LTPTs: (D) SPECIAL RULES.— (i) TIME OF PARTICIPATION.—The rules of section 410(a)(4) shall apply to an employee eligible to participate in an arrangement solely by reason of paragraph (2)(D)(ii). (ii) 12-MONTH PERIODS.—12-month periods shall be determined in the same manner as under the last sentence of section 410(a)(3)(A). The last sentence of section 410(a)(3)(A) says: For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee's employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced. This is the language that gives rise to the ability to shift the eligibility computation period to the plan year starting within the participant's first 12 months of employment. If the plan provides for the a shift in the eligibility computation period for LTPTs, then an LTPT very likely will have the eligibility service to enter the plan before the LTPT employee's 3rd anniversary of employment. I have not seen anything that requires the plan to apply the same eligibility service computation period to all employees. If there is no such requirement, then the plan sponsor may consider using the anniversary date ECP for LTPTs and the shifting rules for non-LTPTs. Given the lack of guidance, the recommendation is for a plan sponsor who chooses to take this route of having differing rules minimally to adopt a formal eligibility service policy for LTPTs in anticipation of a future plan amendment. This is all dependent on the availability of data and systems to be able to do the eligibility determinations correctly.

I spoke with Ms Kelsey about that because I don't agree with her interpretation. the rule says three "consecutive years" for 500 hours. It doesn't say overlapping years.

So Friday 12/29 right?

I don't think I have ever seen a SHNEC allocation condition that excludes key employees. I have seen SHNEC allocation condition that excludes HCEs. "Key employee" is a term of art used to determine if a plan is top heavy and there are several criteria based on ownership percentage, officer status and compensation, plus in some cases the total number of key employees may be limited to a subset of employees who meet the criteria. Top heavy provisions and related definitions often appear in a separate section of the plan document, and it the case of pre-approved plans, in a separate section of the basic plan document. If this plan is using the top heavy definition of key employee as an allocation condition, then the plan will have to specify the year of the determination of the key employees. Top heavy testing is done as of the last day of the prior plan year, so key employees for that test are determined based on ownership in the prior year.

The plan is now SH. Only dealing with 2020 and the cost of correction. Maybe a suggestion to revise §401(k)(3) to the effect that if the ADP of the NHCEs are greater than say 6.5%, then the ADP test is satisfied. [Typically, the 402(g) limit divided by the 401(a)(17) limit is roughly 6.7%] This may be the 401(k) equivalent of the Rule Against Perpetuities.

There are two failures here: the missed deferral opportunity, and the failed ADP test. The QNEC used to correct the MDO is limited to the 402(g) limit. The cite on that is rev. proc. 2021-30 appendix B.02(1)(a)(ii)(B)(1) A QNEC included in the ADP test under the 401(k) regs does not have a similar limitation. However, this is a very unique situation, and as you have explained the numbers give a result that is wildly disproportionate to what most of us would consider to be a reasonable outcome. If this were my client, I might try to apply under VCP to amend the plan for 2020 to a 4% safe harbor non-elective contribution, and then use the 3% QNEC on top of that for the MDO.

with credit to Mercer at https://www.mercer.com/en-us/insights/law-and-policy/secure-2-0-student-loan-match-101/: maybe it can't be made on a payroll basis...

May I ask why not doing a conversion? Cusefan has very good points and then some to the reasoning of terminating. This way, you will continue with the very high deduction limits, not to worry about prior distribution adjustments, establishing new salary history etc etc. Simply do the conversion at end of the year with the (A+B) method - only permitted method. Of course, I have no idea what the facts and circumstances are here so everything I am saying above is from my point of view.