2-year eligibility and coverage

[Guest Bandb]

If a plan has a 2-year wait to enter, are the employees with greater than 1 YOS but less than 2 excludable from 410(B) coverage?

[rcline46]

My opinion is yes with a caution - much testing refers to the 500 hour rule, so if you end up crosstesting / using the ABPT then they are counted as zeros.

For the 'normal' 70% test they would not be counted

[Guest merlin]

Why would the 2-yr entrants be in the AB% test, but out of the ratio % test? A 2-yr wait satisfies 410(a)(1),therefore they are excludable under 1.410(B)-6(B)(1),no?

[rcline46]

Consider the normal ABPT rules - you do not include anyone who has not met the eligibility rules, the maximum of which is 21/1, dual entry. The caution on the 2 year eligbility is watching for the entry date. Elapsed time rules would give you an earlier entry date (usually) than Year of Service rules. BUt suppose someone is hired Jun 1, 2000. Their entry date is Jan 1, 2002 because they have completed two plan years in which they worked 1000 hours.

If they terminated Apr 20, 2002 they would have 500 hours in and need to be in the ABPT. Yet they had not actually completed 2 years of employment. That is how I understand the rules.

[Guest merlin]

I am assuming that in your example your plan defines the initial eligibility computation period as the employee's first 12 months of employment, and the second and succeeding ecp as starting with the first day of the first plan year beginning in the initial ecp. The first two ecps overlap and the hours of service credited to the overlap period count toward both ecps.So yes it is indeed possible for the employee to be credited with two eligibility years while completing less-possibly a a lot less-than two years of employment.But if the plan defines the ecp solely based on the employee's employment year without shifting to the plan year this will not happen in your example.If the plan has one entry date (1/1 nearest the completion of eligibility) he doesn't enter because he terminates before completing his 2nd ecp. If the plan uses two entry dates (1/1 and 7/1 after completing eligibility) he doesn't enter because he doesn't make it to his entry date,7/1/02.

I agree that in your example he would have to be counted in the coverage test because he did enter, and the terminated with >500 hour of service, but I don't understand why you say he would be in the AB%T but not the Ratio % Test ? If he's excludable for one he's excludable for the other.Which brings me to a more basic question? Why do you think that 2-year eligibility is not allowed for determination of who is an excludable employee? My references are above. Have I missed something somewhere else?

[M R Bernardin]

If you look at the statute, you will see that the ability to exclude employees who have not satisfied minimum participation under 410(a) does not include the ability to exclude employees who have completed more than 1 YOS, even if the plan's eligibility rules require 2 YOS.

[Guest merlin]

1.410(B)-6(B)(1) says that a plan can use any exclusion allowable under 410(a)(1) to determine the excludable employees. 410(a)(1)(A)(ii) says 1 year of service.410(a)(1)(B) says you can substitute 2years of service for 1 year if clause (ii) of paragraph (A). Paragraphs (A) and (B) are part of 410(a)(1), so I read it to say that either service requirement is permissible.

[M R Bernardin]

Take a look at Code Section 410(B)(4)(B), which says "If employees not meeting the minimum age or service requirements of subsection (a)(1) (without regard to subparagraph (B) thereof) . . . (emphasis mine). Subparagraph B is Code Section 410(a)(1)(B), which contains the two-year rule.

[Guest merlin]

No.410(B)(4)(B) says (translating into English): if you have a plan that uses a service requirement that is more liberal than 1 year you can exclude those participants who meet the plan's eligibility requirements but who do not have 1year of service and test them separately for coverage.In other words,assuming a 6-month eligibility requirement, you can carve out those participants who have 6 months of service but not 1 year and test them separately.The "without regard to subparagraph (B)" prevents you from extending the carveout to those who have more than 1 year of service.

[M R Bernardin]

Okay, you've almost got me convinced. But if you are correct, then would you also agree that you can set up a 401(k) plan, with immediate entry for deferrals and match and a two-year of service requirement for a 3% safe harbor contribution, subject those with less than two years of service to a separate ADP and ACP test, and get a pass on the ADP test for those with two or more years of service?

[Guest merlin]

OK, educate me. I know enough about 401(k) plans to be dangerous.Can you have different eligibility requirements for the deferrals and the safe harbor? It would seem that the two should be linked because of the pass on the ADP test.If you can have different requirements can you still use the 2-year rule? The 3% safe harbor is geared to passing a 401(k) requirement - the ADP test- and you can't have more than a 1-year eligibility for deferrals.Please note - these are thoughts,not answers.

As you can probably tell I'm not really in my element here. Maybe you should post this as a seperate question on the 401(k) board.

With respect to the 410(B)(4)(B) portion of your question, what this section will permit you to do is remove those participants who are NHCEswith less than 1 year of service from the ADP test,if it is advantageous to do so.I said earlier that you pull out everyone who has less than 1 year and test them separately, but that's old law.It was changed by SBJPA for 1999. Now you just carve out NHCEs and you don't test. Sorry. But you can't pull out anyone with more than 1 year.

[Guest merlin]

See the 2001 ERISA Outline Book,volume 3, p.11.325, item 6.b.The safe harbor contribution must be given to all those who make deferrals, 2-year eligibility is not permitted,and the stautory 1-yr exclusion may be applied to those participants who have been employed less than 1 year.

The statutory exclusion of up to 1 year is explained in1.410(B)-6(B)(3). Convinced now?