Part time employees

[Guest jefe96]

Plan has no age/service reqt. There are 2 part timers who were in the plan in 2003 but decided I guess not to pick up any hours during 2004 and therefore did not work and have no salary. One of them did officially terminate employment during the year but the other did not so she could resume working at some point in time. Question is how should these 2 be classified? Technically they are active ee's with no salary. But if they are listed that way they are included in testing which can't be right since they would have 0% deferral rate. Or should they be listed as ineligible since they have no compensation to receive benefits on anyway? Technically if they did not work any hours then they had a break in service and should be listed as inactive anyways I think? Plan uses 1 year break rules.

[austin3515]

There are at least a few posts on these boards about leaving anyone with zero comp out of the testing. Try doing a seach for "0 compensation" or "no compensation."

[Guest Midas]

There is no black and white guidance on including or excluding employees with zero compensation from testing. The conservative approach would be to exclude (make ineligible). Just be consistent if the scenario arises where an active HCE has zero comp.

[Blinky the 3-eyed Fish]

I think it is absolutely black and white unless you can tell me Midas what percentage to use in the tests? If your answer is 0%, I would ask you why you think it's conservative to exclude a NHCE's 0%?

[austin3515]

http://benefitslink.com/boards/index.php?showtopic=23366&hl=

http://benefitslink.com/boards/index.php?s...opic=23509&st=0

[Guest Midas]

If you feel it is so black and white Blinky I would like to see a cite of some authority, other than these boards, that explains how to handle this. The only thing I can find is from the ERISA Outline, and it states there is no clear guidance on the issue. So I like to see where you are getting your guidance.

In conservative, I mean the most safe approach. At least that is my opinion. I do believe in the absense of clear guidance that opinions are solicited on these boards.

[Blinky the 3-eyed Fish]

Although there is no official guidance it is clear (at least in my mind) for 2 reasons. The first is the continued unwavering opinion of IRS people, particularly Jim Holland, in many a conference that espouses these people with no compensation are not in the test. I realize again that is not official, but it's as official as unofficial can get.

The second reason again goes back to my question. What number would you use in the testing? You can't give me a valid answer to that question, so how could you possibly include them in the test? It simply cannot make mathematical sense.

Lastly, I do not understand your reasoning for conservative or safe. If you are truly trying to provide worst case results (i.e. in case the IRS has been hit by a mysterious ray and is suddenly and retroactively wanting people included with no comp), you would include an NHCE and put 0% and exclude an HCE.

[Guest Midas]

Blinky, where in my post did you get the idea I was suggesting to keep the zero comp employees in the test? Read it again. I would think without clear guidance (and though I agree with you that IRS opinion is a good resource if it can be found) that someone could keep them in the test if they so chose without breaking any known regulations. What to use as the %? That is the question isn't it? That is why it is my opinion to leave them out of the test, both HCE and NHCE, due to the mathematical problems of what % to use. If you are arguing that is doesn't make mathematical sense (as I agree with you) then why would you think it would make sense to use a 0% for a NHCE and not a HCE. I understand that using a 0% for a NHCE and marking the HCE as ineligible is the worst case scenario for the test, but I believe using a 0% for either, is the aggresive approach. Therefore my opinion.....leave them both out.

[Blinky the 3-eyed Fish]

You didn't espouse an opinion either way, only that "The conservative approach would be to exclude (make ineligible) (the NHCE)." What you did espouse is that it isn't clear on what to do. I just said I think it is clear. What I didn't say was that you had an opinion either way on what to do.

If you are arguing that is doesn't make mathematical sense (as I agree with you) then why would you think it would make sense to use a 0% for a NHCE and not a HCE.

I am obviously not saying it makes sense to do this. I was saying that if you want to show the absolute worst testing results, then this is what you would do.

It must be semantics in our definitions of conservative and aggressive. Being that the basis of any testing is to check discriminatory in favor of HCE's versus NHCE's, I take aggressive to mean you are showing results that are more likely to be considered favorable toward HCE's. That is why I define showing a 0% for an NHCE as ultra conservative. I wouldn't consider anything that hurts the testing results to be aggressive.

[Guest Midas]

Blinky - I would consider using 0% for zero divided by zero to be aggressive, when it can just as easily be viewed as 100% (when in reality it is has no definite value in arithmetics). So, yes, I agree, it seems to be semantics we are dealing with. At 100%, leaving the NHCE in the test is no longer the worst case scenario for the test, and as such, no longer the most "conservative" (by your definition) approach. For this reason, I believe neither HCE nor NHCE should be included when there is zero comp. Thus, the statement "the conservative approach would be to exclude". I did not initially clarify your question on what % to use becuase I was not suggesting to keep them in the test (that was clear at least in my mind), and I was more curious about what "black and white" guidance you were obtaining. As much of my guidance on "grey" areas has been passed down to me from a legal department, I was curious as to why this was titled "grey", if indeed black and white guidance existed.

This has certainly been a lesson to me in how not to post an answer. I definitely should have prefaced my original statement with "in my opinon". I will need to work on my writing skills (or at the very least be much more detailed in my answers) so as to avoid semantic issues in the future. Though, as a newcomer to these boards, I have found that agruing over semantics seems to be more of the practice than answering the actual question that was posted.

[rcline46]

I was waiting for the more obvious, and to me, in my opinion, but maybe more clear from the regulations, reason to NOT include -0- pay persons.

The ADP/ACP testing is required to include all employees who are eligible for the (k)/(m) portion of the plan. So the question is whether the persons in question are (a) an employee, and (b) are the eligible.

Employee - using the 20 (or 23) point test to determine if a person who performs no hours of service for which they are compensated leads me to believe they cannot be an 'employee'. Being on the list of possible persons to be asked to perform services does not give rise to the status of 'employee' no matter what they may be called.

Eligible - not only does one have to satisfy the age and service rules, and have attained an entry date to be eligible, they must have 'compensation' from which they can make deferrals. This is arguement advanced by Jim Holland. If they have no compensation, then the person(s) cannot make a deferral, or stated a bit differently, is not eligible to make a deferral. Since they cannot even choose to make a deferral, then they do not belong in the test.

FWIW, IMHO

[GBurns]

IMHO, the problem is that the election to defer is prospective and therefore at the time of election to defer there is no compensation yet earned and other than a crystal ball there is no way of knowing whether or not there will be any compensation earned. A slightly similar situation occurs regarding "employee" especially part-timers. These are hired (or kept on a roster) pending hours coming available. Hours during which to render service might not become available at any time during the year.

So IMHO, you could end up with persons who were participants in 1 year, and who start off as participants the next year, having no hours of service and/or no compensation during that year. Are these "employees"? Are these eligible plan participants for testing purposes?

How are these to be treated?

Using what rcline46 posted etc, they would be neither employees nor have compensation.

[AndyH]

He who Blinks quotes Jim Holland slightly differerently than I heard, probably because it was too hot at the conference he attended. I (and 1,500 of my closest friends) heard him say:

"No compensation. Not an employee. Not in the test. ANY test."

Could not have been clearer.

That is official enough for me.

[austin3515]

Anyone have a link to where that is in print? Like a Q&A posted on ASPA's page or something?

[mbozek]

Why is this Q an IRS issue and not an employer decision? If the employee receives no comp for services in a plan yr, the employer can treat the employee as terminated, the same as an ee who walks off the job and never comes back. If the ee pertforms services in a later year then the ee will be rehired.

[Just Me]

Except of course for things like FMLA leave, STD, LTD, etc....

[mbozek]

FMLA is not unlimited - the ee has to return at the end of the leave. I dont understand your reference to disability.

[Gadgetfreak]

Wouldn't this be different in an S-Corp or vs. a K-1 situation? I can see an S-corp where 0 comp means you are not included in the tests. But if there is a positive K-1 at all, wouldn't that mean there IS comp from the company and therefore he SHOULD be included in the test?