different eligibility requirements for salaried vs. hourly

[Guest Boilerburm]

I have a client that wants to have their 401(k) plan have a 3 month wait for salaried employees and a 12 month wait for hourly employees. Naturally, the salaried group has HCEs, and the hourly group doesn't. I assume that I have a discrimination problem - right? If yes, any comments or ideas on how I can make this work? TIA

[Tom Poje]

interesting.

you are going to end up with a bunch of NHCEs between 3 and 12 months who will be includabe and not benefiting.

the ADP test can exercise the revised rule where you treat these nhce as 'otherwise excludabe' and treat similarly employed hces as includable.

however, coverage doesn't have that rule, so you will have a bunch of nhces treated as includable and not benefitng and a bunch of hces as includable and benefiting.

well, maybe...remember, HCE definition is 80,000 (indexed) in prior year, so you shouldn't have many hces who would enter the plan after 3 months - not enough comp in prior year.

the only hces who would be a problem would be owners.

but of course this is in the future. It sounds like you are looking at establishing a new plan, and therefore you could have a bunch of hces the first year.

Without seeing numbers, I think after the first year you wouldn't have a problem because you could test otherwise excludable option, and after the first year you probably wont create any more hces with only 3 months of service. I suppose the initial plan year you could include all nhces with 3 months and then switch to 12 months, but good grief. why make pensions so tough.

[Guest Boilerburm]

Thanks, Tom.

Actually, it is not a new plan, so I think you are right in that I won't have too many HCEs affected by this at all. My main concern then is if a new owner is brought in. If I don't have that happening, I shouldn't run into any other problems.

The other thought that crossed my mind - Is this a BRF issue?

[MWeddell]

Eligibility conditions affect who is eligible for the plan. They do not treat some eligible employees different from other eligible employees. Hence, there's no BRF or any other 401(a)(4) issue here.

Even in the occasional instance where you've got a HCE with less than 12 months of service, such as when a 5% owner (including one through family attribution rules) is a new hire, there's not necessarily going to be a testing problem. Treas. Reg. 1.410(B)-6(B)(3)(ii) allows one to test the otherwise excludable employees separately, but this isn't mandatory. For the year during which one has an HCE in the otherwise excludable employees, consider testing the plan as a whole, excluding only those with less than 3 months of service in your example. Another solution is to exclude from coverage anyone who is an HCE and has is < age 21 or has < 1 year of service as of the last day of the plan year.

[Guest ASIRE]

The right to make deferrals to a plan (i.e., the right to participate) should be a BRF just as the right to make each rate of deferrals is a BRF. It seems like a right or feature applicable to employees that can reasonably be expected to be of value. 401(a)(4) talks in terms of employees rather than eligible employees and, in any case, all employees appear to be eligible employees since they need only complete the required service to participate. I would be leery of using these rules under the facts as stated.