Otherwise Excludable Employees

[Guest dll]

Two questions:

1. I did not attend the ASPA IRS Q&A session and would appreciate it if someone would explain the IRS position on entry dates.

2. Do we still have the option to test separately?

Thanks.

[Tom Poje]

as always, the Q and A's do not represent an official position, bear that in mind.

in response to the question re: otherwise excludable testing

"...must you use the plan's entry dates or may it use the maximum dates permissible under 410(a)(4)?

A. the employer COULD use the maximum dates. (emphasis mine)

Would the same rule apply for purposes of the early particiaption rule under Code section 401(k)(3)(F)?

The employer could ONLY use the one year eligibility of 410(B)(4) and not the maximum dates of 410(a)(4).

I would add, when discussed from the floor, the comment was somewhat backtracked, indicating that 410(a)(4) and 410(B)(4) work together in tandem, implying that you can use the maximum 6 months in all cases.

[austin3515]

All the TPA's I've talked to would do it if it meant the difference between pass/fail. But it is a "riskier position" and there's no telling what a particular IRS agent wouldgive you a hard time on.

If employed I would communicate to the employer that there is some risk to it. That way if they get burned you can say I told you there was risk.

[Earl]

(F) Special rule for early participation. If an employer elects to apply section 410(B)(4)(B) in determining whether a cash or deferred arrangement meets the requirements ofsubparagraph (A)(i) , the employer may, in determining whether the arrangement meets the requirements ofsubparagraph (A)(ii) , exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age and service requirements ofsection 410(a)(1)(A) .

(This says "met min. age/svc", does not say "and entered the Plan")

Tom - The 3 possible ways of interpreting this technique have always scared me.

Plan with 21 & 3 mos/quarterly entry:

Full time NHC EE is hired 8/15/01. For 12/31/02 ADP test, you are saying that IRS seemed to say he is in ADP test. And that if he was hired 10/15/01 the answer is the same? (i.e. no entry date is considered, only 12 months of service).

And then "when discussed from the floor" they seemed to say that he could be excluded in either case because you could assume dual entry dates, regardless of actual quarterly entry? (I don't know what discussed from the floor means.)

Personally, I use no entry dates and see if I pass, if not I proceed to use plan entry dates and see if i pass, if not I proceed to dual entry dates. There is some judgement on moving to each next level but that's the process. (If I can avoid a $35 refund using dual entry dates, i risk it. If the refund would be $5,000 i don't get so bold.)

Thank you for your opinion and information.

[Tom Poje]

410(a)(1) Minimum age and service:

(i) age 21 or

(ii) date on which he complete 1 year of service

410(a)(3) 1 year of service is generally understood to be completion of 1000 hours in a 12 month period

410(a)(4) Time of participation - (A) first day of plan year

(B) 6 months after the date satisfying such requirements

The IRS (informally) said you can use the maximum permissible under 410(a)(4)

thus ignore plan's entry dates, because you could have written your plan to read first day of plan year and 6 months after ee attains age 21 or completes 1 year of service.

Wouldn't hat be fun if you used comp from date of participation!

In regards to 401(k)(3)(F), this is the new rule that was added a few years ago in regards to the ADP test

"... exclude from consideration all elligible employees (other than HCEs) who have not met the age and service requirements of section 410(a)(1)(A)

[note, 410(a)(1)(B) is not included, this refers to 2 year wait and does not pertain to 401(k)]

the Q and A's are submitted to the IRS, and they provide answers, so the handouts can include these answers. At the conference, the Q and A's are then further explained and discussed - not all of them, but selected the IRS and or members of ASPA think need further clarification. The Q and A (#32) in particular, if I am not mistaken, was brought up by the IRS, and that is where they said they initially read 401(k)(3)(F) to only refer to age 21/1 year of service [410(a)(1)(A)]. Thus their original answer. But then they said that section is tied to 410(a)(4) which is date of participation.

again, the Q and A's are not, or do not represent the official position of the IRS, nor have they been reviewd or approved by the Service or Treasury. Based on the regs cited above, I would agree with their position, you should be able to exclude the ees using maximum exclusion. However, it is not up to me decide how one should their run plan. One has to go with what one feels comfortable with, and what one believes one can justify (not "I needed to do it this way to pass the test").

In the example of an ee hired 8/15/01 (with quarterly entry dates)

my understanding of the IRS position was

under old rules option: ee is otherwise excludable for 12/31/2002, whether he is HCE or NHCE

under new rules option: ee is otherwise excludable if NHCE and includable if HCE. Their initial position was that NHCE would also be includable because you only consider completion of 1 year svc and age 21 and don't consider particpation entry date.