Tips for passing ADP test - plan with large number of transient worker

[maverick]

One of our clients has a plant in Georgia. About 75% the employees are Mexican citizens in the U.S. on green cards; the vast majority of these ees are not deferring into the 401(k) plan.

The way I read the regs, the non-resident alien exclusion would not apply.

Other than going to a safe harbor 401(k), which the client does not want to do, does anyone have a creative way to get by the adp test?

About the only thing I can come up with is to accept that the NHCE adp will be low, and go with prior year testing so the HCEs know exactly what they can defer.

Also, there could be a compensation adjustment to "make up" what HCEs want to put into the 401(k).

Thanks. Maverick

[QDROphile]

You might check to see what a year (or two year) of service requirement for initial eligibility would do for you. You did not say if you had rapid turnover in the population.

[R. Butler]

A 401(k) plan can't require two years of service for the deferral portion. The best you could do is a year of service and have them enter 6 months later.

Provided you could still meet coverage testing you may be able to exclude at least some of the employees for some other reason (i.e. job classification).

[KJohnson]

You may consider automatic enrollment (negative election)--but you might as well go ahead and do a message board search on "finding missing participants" because you will have to distribute the amount deferred to the particpants.

I would worry a little about the "effective availablity" of being able to receive amounts in cash rather than the deferrals (which is required for negative elections to work). But if you have communciation materials in Spanish and the opportunity to "waive out" of the deferral is made clear, I don't suppose there would be a problem.

[Guest KB]

Our company's plan has the same type employee demographics - many lower paid employees who do not actively participate. One thing we do is restructure the ADP group since our plan allows employees to participate sooner than age 21/1 year of service. We restructure out the employees who may be eligible but who are not age 21 and/or have 1 year of service, and thus don't include these 0s in the ADP Test.

[RCK]

I don't think that KB's solution helps with Maverick's problem. KB seems to be saying let a bunch more people into the plan earlier, and then exclude them from the test. Doing that would leave the same problem that Maverick started with.

Bottom line is that there is not an easy solution. Auto enrollment will work but as KJohnson said, you have communication issues and lost participant issues. A safe harbor would work, but costs will be very high.

The tricky solution is to do your test at the end of the year, and assuming your plan allows it, make corrective contributions starting with the lowest paid NHCE and working up until the test is passed. Can be very cost effective. Will be very time consuming.

RCK

[KJohnson]

Your Plan must specify the "bottom up" QNEC indicated by RCK. Also, be aware that the IRS is probably going to put an end to this method because of the increased 415 limits in EGTRRA.

Let's say you have a participant making only $2,000 who does not defer. You can now make a $2,000 QNEC for this participant and give him or her a 100% ADR. Obviously one NHCE at 100% goes a long way in satisfying your ADP test.

The IRS is well aware of this "trick" and has indicated that you should expect to see some guidance on this issue.

[maverick]

A couple hours before the holidway weekend begins, and already 6 responses!!! Thanks all.

BTW, I forgot to mention that for the 401(k) they require 2 months service (age 18); entry date is the first of the next month.

I think the best thing to do, other than talking the client into switching to a safe harbor arrangement, is run the tests, but hold out anyone under 21 w/less than 1 year of service. A lot of the people in this category will be gone before they would enter the plan if 1 year/1,000 hours/ age 21/enter next 1/1 or 7/1.

Also, concur with the KJohnson re: missing participants. Unless a concerted effort is made to find and pay out terms w/small balances, the plan could end up needing a large plan audit.

Have an enjoyable and safe weekend. Tom (aka Maverick)