How Do You Exclude Employees from Participation?

[Guest PensionNW]

I believe that a plan cannot exclude employees by name but I cannot find a citation that confirms this. I know that 1.410(a)-3 allows exclusions based on criteria other than age and service. Why not just exclude certain employees by name? (Which as I started with, I don't believe is permitted.)

However, the IRS doesn't seem to mind discrimination against HCE's so can a plan can exclude certain HCE's by name?

Also, if employees are excluded by job classification and all employees in a certain classification are say older than age 50 (assume that all the older employees are titled "Executive Associates" even though age is not a requirement to be labeled an Executive Associate, it just works out that way, and the plan excludes Executive Associates) , this appears to have the effect of imposing discrimination based on age. Does anyone have a citation prohibiting this? I suspect it may also run afoul of 1.410(a)-4.

I realize that even though the plan may exclude people by job classification that these employees will not necessarily be excludible employees and will count against the plan for purposes of 410(B).

[Alonzo]

I think the reg you have in mind is 1.410(B)-4(B). This just relates to the "reasonable classification" portion of the average benefits test.

[Guest PensionNW]

1.410(B)-4 applies to the nondiscriminatory classification test which is something that one cares about when performing the average benefit test. I don't believe that the provisions of 1.410(B)-4 apply if the plan passes 410(B) on the basis of the ratio percentage test.

Reg. 1.410(a)-4 addresses maximum age conditions applied to employees excluded from the plan as a result of reaching some maximum age.

My question really applies the ability of a qualified plan to exclude certain non-excludible employees rather than the issue of passing the coverage tests.

[mbozek]

There are two types of age discrimination under Fed law: Disparate treatment which forbids discrimination on account of an age requirement, e.g. plan cannot exclude employees over a certain age and disparate impact- plan cannot use an age neutral classification that impacts adversly on employees age 40 or older, e.g., plan cannot exclude employees based on a classification that impacts only on ee over 40. Excluding exec. associates could result in disparate treatment if they are all over 50. The Fed ADEA is not preempted by ERISA or the IRC and applies to all employers with 20 or more employees. You should consult with employment counsel to determine if the ADEA is an issue.

[Alonzo]

You won't find anything in the 410(a) regs or guidance that prohibits you from naming names. The reg I cited is the only 410 reg that addresses the practice.

One thing you might want to bear in mind -- if you intend to add names as you go along, you will have to amend the plan often, and make sure the amendments are signed before a "named" employee otherwise becomes a participant. This could be a very awkward procedure, particularly if plan amendments require board approval.

[Guest PensionNW]

After thinking about this overnight I am now convinced that you can exclude employees from participation by name only if the plan can pass 410(B) by the ratio percentage test, otherwise the nondiscriminatory classification test of 1.410(B)-4 would apply, and this appears to prohibit exclusions by name.

[AndyH]

Correct.

[jaemmons]

Just make sure that no part of the plan must utilize 1.410(B)-4 for nondiscrimination purposes (e.g. 401(a)(4) testing for availability of any benefit right or feature and general testing for new comp). Just because the plan passes the ratio percentage test for yearly coverage, it still may need to prove the classification nondiscriminatory.

[AndyH]

No, I don't agree. Testing under 401(a)(4) gets a free pass past the reasonable classification requirement.

[jaemmons]

AndyH,

If a plan is cross-tested, which may or may not be the case here, and each rate group cannot satisfy 410(B) using the ratio percentage test, then you must demonstrate that the groups pass the nondiscrimination classification test of Reg 1.410(B)-4 and the avg benefits test under -5. Coverage testing for each rate group is determined the same as for initial eligibility. As such the exclusion by name may or may not be allowed.

I agree with you to the point that most of the time, once a plan passes the ratio percentage test that all BRF's will pass nondiscrimination testing. However, I have always taken the conservative approach that any classification, whether it be for initial eligibility or for allocation groups, must meet 1.410(B)-4. It eliminates an explanation to the IRS during a document determination letter process for an individually designed document to support the exclusion by name.

[AndyH]

Sorry, but I still completely disagree. Where's Blinky when you need him? Tom, you on vacation? Calling EF Hutton...

I'll explain when I get a minute if nobody beats me to it.

[AndyH]

It is subtle. Look at 1.401(a)(4)-2©(3)(ii).

"(ii) Application of Nondiscriminatory Classification Test"

A rate group satisfies the nondiscriminatory classification test of section 1.410(B)-4 (including the reasonable classification requirement of 1.410(B)-4(B)) if and only if the ratio percentage is greater than or equal to the lesser of [the midpoint or the r/p of the plan].

The key is the section in parentheses.

The DB general test section 1.401(a)(4)(3)©(2) says that "the same rules apply as in section 1.401(a)(4)-2©(3)"

You may be right about Benefits, Rights, and Features, however, as I don't see the same "free pass" past the reasonable classification. So I guess your allocation groups don't have to be reasonable but your BRFs do? Seems weird.

[jaemmons]

Andy, I see what you are saying. I know that from a technical standpoint the application of 1.410(B)-4 seems limited, if the plan passes coverage using the ratio percentage test, but I still remain conservative and view any direct/indirect classification by specific name (e.g.-all employees with red hair are excluded) as an unreasonable exclusion which is not based upon objective business criteria.

Although the IRS may view this exclusion as nondiscriminatory, by application of the Code and Regulations, I still think that an employee has a basis to complain to the DOL about discrimination regarding benefits.

I guess I am just a little too conservative for this discussion.

[Guest merlin]

Andy's interpretation was confirmed by the IRS in the Q&As at the 1998 ASPA Conference.

[Guest merlin]

Left out the most important part. It was question 76. Sorry.

[AndyH]

Thanks, Merlin. Right on point.