Non-discrimination Testing

[Guest The Pension Kid]

I have a Cash Balance with supplemental 401(k) plan to test. There is a certain individual who is eligilbe to defer, thus eligible for Safe Harbor. However, this person is not eligible for the Cash Balance plan or for a discretionary Profit Sharing contribution, b/c they didn't work 1000 hours.

What tests do I have to include this person in? (My main test of interest are: 1) 401(a)(26), although since they aren't eligible for the CB plan, I'm quite sure that I don't include them. 2) 410(b) 3) 25% deduction and 4) 401(a)(4).)

I appreciate any and all help that anyone is able to give me.

[Mike Preston]

1) 401(a)(26) - No, they don't count in numerator, because they aren't participating. They count in the denominator only if they would otherwise be eligible for the plan but for some factor other than age or service. Hence, if the plan excludes a certain class of employees from participating, but otherwise has a zero hour exclusion, then this individual would count in the denominator because he would be a participant but for the fact that he was in an excluded class. In your case, that doesn't seem to apply, so they aren't in the denominator, either.

2) 410(b) - Again, if they meet the definition of excludable employee, then you can exclude them from the test if you are excluding excludable employees from the test. Kind of a fun statement, that.

3) 404(a)(7) - well, you include and you don't include. You include the compensation and the SH contributions. But because this person is not participating in the DB plan you don't otherwise create the 25% limitation just because of this person. Obviously, in the situation you described, I'd be shocked if part of your plan design was to attempt to avoid the 25% limit all together.

4) 401(a)(4) - include in any test where this class of excludable employee is tested. That is, if you test under 401(a)(4) by permissibly disaggregating the excludables from the non-excludables, this person goes into the excludables being tested. If you don't disaggregate, yes this person is counted.