Eligibility Question

[bzorc]

A brand new start-up company, formed July 1, 2001, desires to have a qualified plan to benefit the new owner. Plan is drafted with the following eligiblity requirements:

If employed on July 1, 2001, employee is immediately eligible for the plan. After that, eligibility is the attainment of age 21, with semi-annual entry dates.

The company adopts the plan with a July 1, 2001 effective date and then hires a series of new employees after July 1 and before December 31, 2001. The company now wishes to amend the eligibility requirements to require 1 year of service instead of only the attainment of age 21.

Effective January 1, 2002, can we amend the plan to reflect eligibility of age 21 and one year of service (1000 hours) so new employees hired after July 1, 2001 will not enter the plan until January 1, 2003 (i.e., after completing one year of service)?

Thanks for any answers and comments.

[Mike Preston]

Interesting. I believe that you can effectively do this, although the route to accomplishing it may not be suitable for all clients. Amend the plan to provide that those who were eligible as of a given date (1/1/02) are no longer eligible after the adoption (and potential notice period) unless they satisfy 21/1 on that date. However, having done so you need to analyze 410(B) in light of that. I think you will find that you will need to count those that were in the plan as participating but not benefitting, and therefore you may fail 410(B). On the other hand, if you disaggregate and test 410(B) based on statutory eligibles on the one hand and non-statutory eligibles on the other, it looks like only those employed on 7/1/2001 would be statutory. So it looks like it might work. You'll want to pour through the regs on this one, of course, because this route is not travelled often. But it may just work. You may not find that your document allows this type of language, so it may be an individually designed plan once you go through the process. However, maybe it can be done on a volume submitter document and maybe the IRS would allow it as a non-major modification that would allow you to remain just outside of individually designed. Good luck.