5/1-4/30 plan year with 7/1 & 1/1 entry dates

[R. Butler]

ABC Plan has a fiscal year 5/1-4/30. Plan entry requires 21 & 1. Currently entry dates for all contribution sources are 5/1 & 11/1. ABC Co. wants to keep entry dates for profit sharing at 5/1 & 11/1, but wants to change the entry dates for 401(k) to 7/1 & 1/1. I don't see any reason they can't do this, but for some reason I gotta feeling that this will create a problem that I am just missing.

Does anybody see any issue with this?

Thanks in advance for any guidance.

[rcline46]

I have researched this in the past. The effective date of the plan must be an entry date, after that you are on your own with the old priviso that you cannot keep anyone out more than 18 months. I don't see a problem.

[ccassetty]

I don't think there is any reason why you can't do this, but I think that, administratively, it's going to be a mess.

(just thinking out loud here) If you have comp definition from date of entry, and the plan year is 5/1 through 4/30, what will the plan's definition of compensation be for 401(k) testing? It seems to me that you would have two partial year comp figures and one whole year comp figure. you would have 5/1 through 4/30 for those already in the plan, 7/1 through 4/30 for those that enter on that date and 1/1 through 4/30 for those that enter on that date. Then for ps allocation, you would have to have compensation from 11/1 through 4/30 for those that enter on that date. Most employers I've dealt with get confused with one mid year entry date.

I'm not sure if you could use the 11/1 through 4/30 compensation for 401(k) testing and ignore the other entry dates in order to simplify, but clearly that would play games with the percentages, artificially inflating the percentages for those that enter on 7/1 and artificially reducing the percentages for those that enter on 1/1. And, what if someone was not eligible for the 11/1 entry date but was eligible for the 1/1 entry date, what then? I know I would not want to explain (or defend) this to an IRS auditor.

Section 1.401(k)-1(g)(2)(i) says you can use the calendar year that ENDS within the plan year for determining compensation for testing purposes. For the 2003-2004 plan year you would be using 2003 calendar compensation.

Of course, if the employer provides the safe harbor notice and makes the 3% non-elective contribution, then all these compensation questions would be a non-issue. But it's too late to do that for the 03-04 year.

What is the employer trying to accomplish by doing this, will changing the entry dates accomplish it, and is that result worth the extra administration hassles that will go along with it?

[R. Butler]

Compensation is determined over the entire Plan Year. If they make the change for the 401(k) they will probably eliminate the 11/1 entry date for profit sharing (its only there now because of the 401(k)).

They want to make this change to make it easier to identify those eligibile for the 401(k). They have several employees each year that are work right around the 1,000 hour mark. For initial eligiblity you gotta work 1,000 hours. They provide us with census data in early May anyway. Rather than go through payroll data in March to determine 5/1 eligibiles. They just want to do it all at once in May.

[Tom Poje]

consider 410(a)(4) after completing the minimum age/service requirements

Time of participation you must enter no later than the earlier of

(A) The first day of the plan year....

so plan year begins 5/1

how does the 7/1 and 1/1 entry dates get around the problem?

If ee was hired 2/1/2002 he completes 1 year of service on 2/1/2003 and must come in on 5/1.

[R. Butler]

Thanks, I knew I was missing something.

[rcline46]

For Tom Poje, obviously you would not have the first day of the plan year as an entry date. It is not a requirement by the DOL or the IRS. The document would only mention 1/1 and 7/1.

I never said it would be easy to administer! Just that it was possible.

[Blinky the 3-eyed Fish]

Rcline46, why do 410(a)(4) and 202(a)(4) not apply?

[Tom Poje]

Blinky,

I think you don't have to have the first day as an entry date, but then you will have lots of fun doing coverage testing, because at 5/1 the person is includable and not benefiting, but at a later date date he would be includable and benefiting. That means you would have to do multiple coverage tests.

I wonder how the schedule T gets filled out when you have multiple conditions like that.

I wouldn't touch a plan like that.

[Blinky the 3-eyed Fish]

Okay, I am confused Tom about your last comment. Here is 410(a)(4):

"A plan shall be treated as not meeting the requirements of paragraph (1) unless it provides that any employee who has satisfied the minimum age and service requirements specified in such paragraph, and who is otherwise entitled to participate in the plan, commences participation in the plan no later than the earlier of--

(A) the first day of the first plan year beginning after the date on which such employee satisfied such requirements, or

(B) the date 6 months after the date on which he satisfied such requirements, unless such employee was separated from the service before the date referred to in subparagraph (A) or (B), whichever is applicable."

Here is the first part of 410(a)(1)"

"(1) Minimum Age And Service Conditions

(A) General Rule

A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates--

(i) the date on which the employee attains the age of 21; or

(ii) the date on which he completes 1 year of service."

By my logic, if a participant does not enter by the earlier of the first day of the plan year or 6 months after satisfying the eligibility requirements, the plan does not satisfy 410(a)(1). If 410(a)(1) is not satisfied, then the plan "shall not constitue a qualified trust".

See also 1.410(a)-4(b)(2). (I realize this is old, but it connects qualification issues to the entry dates and the mininimum age/service conditions.)

[Tom Poje]

Blinky, you are correct, I have got to much on my desk to think straight.

rcline got me off trackwhen he said

"It is not a requirement by the DOL or the IRS."

It looks like it is

according to the ERISA Outline Book

"the plan must be written so that it is impossible to violate the statutory requirements

...See Rev Ruling 80-360" (2.34 of the 2003 edition)