qualified plan with only one named employee

[Guest Diane DuFresne]

Just came across a 401(k) plan sponsored by a housing association that defines "employee" specifically by name (one individual). The term participant is defined as an employee who satisfies the eligibility requirements. Consequently, this plan was specifically written for one named employee of the association.

This employee is not a highly compensated individual (no highly compensated individuals are employed by the association).

As this plan does not benefit any HCE's , it is deemed to satisfy the minimum coverage requriements of 410(B).

However, I am still having a hard time letting this plan design pass my "sniff" test. I can "discriminate" as much as I like within the NHCE classification? There are 6 other NHCE's that are employed by the association.

Any thoughts on this plan design would be appreciated.

[Guest sdolce]

In a word, the answer is YES.There was an article in the winter,1995 edition of the Journal of Pension Benefits on the topic.Your client will not have a qualification problem.Any problems will be with employee relations.

[actuarysmith]

Some of the "golden rules" of non-discrimination (in laymans terms) are that -

1) You cannot discriminate in favor of HCE's over NHCE's

2) You can discriminate in favor of any HCE over any other HCE, and

3) You can discriminate in favor of any NHCE over any other NHCE.

You may not be able to do all of this in a standardized prototype document, however.

As to whether you can actually use a specific name to define eligiblitiy I will defer to the compliance gurus. I have to admit that it bothers me.

I would try to find some other way to identify that specific individual without actually naming them. For example, Office Manager, Director of Planned Giving, Technicians with a pay grade of 14, personnel supervisor, or Sales Managers with at least 14 years of service, etc. etc.

Good Luck !

[Guest sdolce]

There is nothing inherently wrong with a classification by name as long as you can pass the ratio percentage test. "Reasonble classification" is only an issue if you are trying to pass coverage using the Average Benefits Test. If you need the ABT to be able to use the SH/USH midpoint for rate group testing you're still ok with names because you get a specific pass on the reasonble classification test. This was confirmed by an IRS rep at the LA benefits conference a few years ago.