ADP/ACP testing otherwise excludables

[pmacduff]

Ok Relius users...I have a 401(k) plan with 1 month of service for eligibility (deferrals only). Participant enters on the first of the month following completion of 1 month. There is an employee who was hired on 01/21/2002. 1 month of service completed 02/21/2002, plan entry on 03/01/2002. No problem there. When I run the preliminary discrimination test for 2003 and use the statutory exclusions, this employee is excluded. I was under the impression that when you use statutory exclusions, you still use the normal plan entry date definition. In this case, 1 year of service for this employee is 01/21/2003, and I would say plan entry was 02/01/2003 (just for ADP purposes). The employee terminated on 02/05/2003. Relius ADP test with statutory exclusions lists this employee as excludable. I'm thinking that Relius might be saying that the ADP entry date would be 03/01/2003 (1 year from original DOP???) and since he terminated 02/05 he's excludable. Any thoughts? Thanks in advance.

[Guest John Taylor]

Relius uses the maximum statutory exclusion, which is 18 months from hire date. There still is no definitive guidance yet as to what entry dates should be used: plan entry date, no entry date (just use one year), or the maximum that could be used, which is 18 months.

[pmacduff]

Got a response from Relius support and was referred to a Q&A on the website. I guess I'm still confused and don't understand what they are trying to tell me. The Q & A mentions that the IRS recent comments have indicated that entry date provisions should not apply to statutory exclusions. Relius uses permissive disaggregation (18 months service/age 21 1/2) and mentions that there can be employees improperly excluded. Can anyone give me their opinion in my example as to whether or not you agree it will be ok at plan year end 2003 to exclude this guy or if he needs to be in the ADP tests and cannot be excluded? What would you do & why? This makes a big difference to the client as to whether the HCE will need to be refunded all of his deferrals for 2003 or if it was ok for him to defer. Thanks again...

[Tom Poje]

I vote for ignoring plan's entry dates and using the maximum possible exclusion, which is 1st day of plan year or 6 months after completing 1 yr service or age 21.

At ASPA conference 2002 the following question was asked of the IRS. (one has to remember that answer do not necessarily represent an official position of the IRS, merely the opinions held by the agents at the conference.)

Q #32 A 401(k) plan povides for immediate eligibility and uses otherwise excludable rule to perform its ADP testing. In determining which employees belong in a particular group must the employer use the plan's entry dates or may it use the maximum entry dates permissible under Code section 410(a)(4)?

The employer COULD use the maximum entry dates. (emphasis mine)

so even in their eyes it is not a clear issue.

[pmacduff]

It seems ironic to me that in this particular case (as with many 401(k) Plans, I imagine) if I use the plan entry date definition it would actually hurt the HCE. On the other hand, if I use the maximums under the Code, I can keep this guy out and allow the HCE to keep all of his 2003 deferrals. This is the kind of thing that is usually too good to be true for my smaller clients

[Tom Poje]

I think of it this way.

The plan could have had 1 year wait, entry date 1st of the plan year or six months after meeting requirements. If the plan had those requirements, what would happen in your testing? Well, all those people you are worried about would never have entered anyway.

So, in reality, yes, it seems like you are favoring the HCEs, but on the other hand, you have let in a bunch of NHCEs earlier than you needed to, so you get the advantage of testing them separately. a reward for being more generous than you needed to be on your eligibility.