IRS Audit - excluding a class of employees

[Guest Mike Spickard]

Had an unusual conversation with IRS auditor looking at one of our DB clients. The client's pension plan excludes "Cashiers". Most work under 1,000 hours, and 410(b) coverage has never been an issue.

The auditor made it clear that in her mind the client is being discriminatory against low-paid employees under new 410(b) guidance and she is going to require them to retroactively put all eligible Cashiers into the Plan. (flies in the face of recent memo where IRS thought plans were giving too much to low paid employees). She said she might have overlooked the exclusion had we excluded the Owners.

I told her that we disagree that this is discriminatory. It is a reasonable classification, and all coverage and discrimination issues are satisfied.

Anyone else have a problem like this? In December 2003, the client filed the Plan with the IRS for a DL, and we are expecting a response soon.

[david rigby]

...in her mind the client is being discriminatory...

I'm not aware of that condition in the IRC or the regulations. Ask the auditor to prove it.

[GBurns]

Where did you see a "recent memo where IRS thought plans were giving too much to low paid employees" ?

[Belgarath]

Gburns - I suspect that he means the recent IRS memo regarding use of short term NHC to receive minimal contributions in order to pass testing. Not that it says that they are giving NHC too much - just the opposite in fact.

http://www.irs.gov/pub/irs-tege/directive.pdf

[Guest Mike Spickard]

Yes, I did somewhat misstate the intention of the memo referenced. It is critical of arrangements which allocate large amounts to the lowest paid employees to avoid higher contributions to moderately paid NHCE's.

[Effen]

Mike,

You IRS issue might have more to do with "cashier" classification. They may feel that you are in essence excluding based on hours, which the IRS doesn't like. We had a similar situation where we excluded "casual" employees (a designation used by the employer). Since some of the "casuals" worked more than 1000 hours, the IRS forced the Plan to change the definition to include any "casual" who worked more than 1000 hours.

You might be focussing your resistance in the wrong place.

[mbozek]

Why not ask the auditor for a written statement of what regs are being violated, not just her opinion? The IRS is required to inform a taxpayer in writing of the specific statute, law, etc that is being violated if the taxpayer requests it. Chances are the agent will not send a letter based on her opinions because it must be reviewed by an IRS attorney. Last time I looked a plan met the 410b coverage test if it covers the requisite number of non HCEs on a % basis, regardless of what classes of NHCEs are excluded from the plan. Any letter from the IRS will have to cite the 410b regs. You should check to see what the DL status is.

[AndyH]

Agreed. As long as coverage is being passed by the ratio percentage test, I don't see any issue at all. If you are using the average benefits test, they may be asking you to justify the reasonability of the exclusion based upon objective business criteria; otherwise that test is not available.

In Effen's case, the issue may be the same or it may be one of an arguably vague definition raising questions of excessive employer discretion or violating the definitely determinable benefit requirement.

[E as in ERISA]

There is a distinction between exclusion of "casual" employees and "cashiers." The 410(b) rules prescribe special rules regarding age and service limitations. The problem with terms like "part time" and "casual" and "temporary" are that they are potentially service (time) requirements -- and since they don't specifically sync with the 410(b) rules re 1,000 hours, etc. then they generally aren't allowed to be used. But the term "cashier" has nothing to do with service or time. So as long as the plan meets the coverage rules without including them, why is there a problem?

[Effen]

Katherine

I agree. What I was trying to say was that maybe the agent was using the same argument with the term "cashier". "Casual", "temporary", "cashier" are just words used by employers to describe groups of employees. The problem with our group, that was called "casual", was the IRS felt it was a de facto service requirement, as you stated.

If the ER would have changed the group's label from "casual" to "cashier", I don't think the IRS would have changed their position.

[Guest Mike Spickard]

Thanks for everyone's insights. These are definitely cashiers, not just "casual" employees. I will let everyone know how this develops.