Otherwise Excludable Employees in First Plan Year

[Guest Giovanni]

I have a Plan which was effective 1/1/03. Eligibility to defer is immediate upon date of hire. In the 2003 ADP test there is 1 HC who is the owner and 9 NHCs. The test fails! This is a new Company in which the hire date of the owner is 10/1/02. One ee was hired on 11/1/02 and the other 8 ees were all hired on various dates in 2003.

Can I disaggregate the otherwise excludable NHCs from the ADP test in accordance with the early participation rule under 401(k)(3)(F)? If I do this, the only satatutory employees left in the ADP test will be the one HCE (the owner) and therefore the ADP test will pass. This seems to be ok, yet I feel a little uncomfortable doing it.........am I missing something?

[Tom Poje]

I dont think you are missing anything. This is one of thise situations where you do get a 'free' ride, so to speak.

[wmyer]

Why is HCE hired 10/2002 in the "upper group" while NHCE hired 11/2002 is in the "lower group"? Are you testing for 2003 or 2004 plan year?

[Guest Giovanni]

I'm not not sure I understand your question. What do you mean by "upper" and "lower"?

I am testing the 2003 year.

[wmyer]

If the HCE has only worked with the new company since 10/2002, and you're testing plan year ending 12/31/2003, he hasn't been there one year. Therefore, he has to be tested along with all the other employees. Otherwise-excludable employee rule wouldn't apply. With the OEE rule, you do separate testing for an "upper" group (participants who have met the 1 year, age 21, entry date requirements) and a "lower" group (participants who are statutorily excludable).

[Guest Giovanni]

Because there is the option of only removing the otherwise excludable NHCs from the ADP test. The otherwise excludable HCEs remain in the ADP test. In this case, the only person left in the ADP test is the one HCE........so therefore the test passes because there are no NHCEs in the test.