Leaderboard

I think it depends on whether you want the Plan to be a loan collection and processing agent for ex-employees or you want that loan off the books ASAP when a participant terminates.

This is an illegal exclusion unless the plan provides a 1000 hours fail-safe. In other words, the plan must provide that, regardless of the excluded class, a part-time employee who actually works 1000 hours enters the plan. Given that, the plan should satisfy the coverage test when using the option to disaggregate otherwise excludable employees.

This would be viewed as failing to withhold deferrals from eligible plan compensation, which is considered an operational error and more specifically a missed deferral opportunity (i.e., plan participants missed an opportunity to defer amounts under the plan). The first method available to correct this error would be to provide the affected participants (1) a corrective contribution in the form of a qualified non-elective contribution (QNEC) that’s equal to 25%-50% of the missed deferral amount, plus (2) if the affected participant is eligible for matching contributions, 100% of any missed matching contribution determined using 100% of any missed deferral amounts (not the reduced 25-50% amount) plus (3) any investment earnings what would have been earned on the contributions made under (1) and (2), if any. It is likely the percentage used for the corrective QNEC will be 50% as it appears that the error may have started a while back, but it could be less if it has only been occurring for a short period. If corrected in this manner, the employer should be able to self-correct even if it has occurred for a long period of time, but that would only be if it meets the rules for self-correcting inadvertent failures. Otherwise, it would only be able to be self-corrected if the error has only been occurring for less than about two years. The other method to correct the error would entail adopting a retroactive plan amendment to conform the plan document terms to the plan’s operation using an amended comp definition excluding the items you enumerated from the plan’s new comp definition for the period at issue. If the employer chooses to correct through retroactive amendment, the correction would need to be to submitted to the IRS under VCP. To get the IRS to agree to the retroactive amendment under VCP the employer would need to explain the expectations of the affected plan participants with regard to these excluded items (here, that they did not expect these items to be included for salary deferrals and matching contributions, if any). This would have to be shown by submitting SPDs, election forms, data statements or summaries of benefits, statements, notices, employee communications, new hire enrollment materials, or any other documents that indicated that these comp items would be excluded for plan contribution purposes. If the employer does not have any documents to submit showing that the participants were informed that these comp items would be excluded, it is unlikely that the IRS would agree to the retroactive amendment and it would likely require contributions be made as described above. Note that retroactive amendments can be used to self-correct but only in instances where the retroactive amendment would increase the benefits for the affected participants. That would not be the case here. There could be another correction the employer could propose if a VCP is submitted... under VCP the employer can propose anything it is just whether the IRS would accept what is proposed (not sure what they would propose but maybe they can come up with something). Also, note that since 2022 VCPs cannot be submitted on an anonymous basis (though you could ask for a pre-submission conference to discuss a potential VCP submission without disclosing the employer’s name, etc. but those conferences are advisory only and non-binding). as usual, this is not advice....

As long as they are otherwise eligible, the fact that they filed under DFVCP for 2020 does not restrict them from using the program for subsequent failures.

I question whether it is possible for a plan to fail coverage the way you have described. Show the numbers for the test.

That's what we are doing...

Some plan sponsors might not decide which deemed election (if any) to implement until there is an immediate need to apply one. For some situations, that might happen as soon as January. But for many typical situations that might not happen until 2026’s spring, summer, or autumn. Illustration: For 2026, Jill elects a deferral of $1,354.16 for each semimonthly pay period [$32,500 / 24]. Jill does not elect that any portion of that amount be made as Roth contributions. Jill would not exhaust 2026’s $24,500 limit on non-catch-up deferrals until the year’s 19th pay period. For the first 18 of 24 pay periods, the plan can credit Jill’s non-Roth deferrals.

As the saying goes: "Better late and right, than first and wrong." Maybe we need to tweak it a little bit: "Better confirmed late and right, than AI first and wrong."

This looks like a creative attempt to incorporate the original Long Term Part Time rules into the document. Hopefully, they did not get too creative elsewhere in the document and create rights to benefits for part timers that the plan sponsor didn't want. In my experience, long entries in the blank lines in the Adoption Agreement available when "Other" is checked or "Describe" is available all to often have lead to operational errors. Assuming you are replacing the document, use the opportunity to clean it up.

I was also questioning how they failed. we are just taking over this plan for 2025. ADP hasn't released the testing results to us yet so I have nothing to show you. I am only going on what my boss said to me yesterday. Apparently there are many part timers who only work a few weekends a year as it's a theater group. I will gladly share the number when I get them. Thank you!

They failing even when testing otherwise excludable separately? That's without getting into the question of whether or not "part-time" is a reasonable classification for exclusion.

We all have our war stories of skirmishes with the IRS and EBSA. We had a plan that went from a one-participant only plan with assets under $250,000 and no EZ filing to a plan that required a 5500. The 5500-SF showed it was an initial filing and had a beginning balance, and the client received a love letter from the IRS. We called the IRS and spoke with an agent who took down the information, submitted it for review, and the issue was closed. All in, we spent more time on hold waiting for an available agent when making the initial call than the time we spent speaking with the agent.

I have sometimes suggested an employer/administrator file a Form 5500 even when the rules excuse it for a small one-participant plan. With other potential advantages, which might include starting the running of a statute-of-limitations period and setting up other defenses: An expense to file an unrequired Form 5500 might be less than the expense of informing EBSA or IRS about why a report or return for an earlier year was not required. This is not advice to anyone.

I am not ashamed to admit I did not make it to page 63 😂😂😂

Because the plan document specifies a new comp allocation, which is not a safe harbor formula, you have to satisfy the general test (aka the rate group test). However if you calculate your rate groups on allocation rates, instead of on accrual rates, then everyone should be in the same rate group and the test should pass easily. You don't need the gateway because you're not cross-testing. You also don't need the ABPT unless your rate group is less than 70% coverage (which is unlikely to happen, unless, as Lou mentioned, there is an allocation condition that isn't met by a large number of NHCEs).