last day rule

[wsp]

I have a client who has a pye of 9/30 and they just gave me their census. The have a new comp plan and all looks good EXCEPT all of the employees who are younger than their son have terminated.

First question is: is it too late to change the groupings so that I can provide the son with a zero.

Second question is dependant upon the first answer being yes, it's too late: Since the son hasn't started working for today...it's possible to actually terminate him. I'm sure the IRS frowns on that, but what precludes us from doing it?

I hate playing games with this stuff, but I suppose you have to get creative when a younger child is involved. better to have multiple groupings to begin with, but that wasn't the case and wasn't necessary for last 4 years.

[Archimage]

My answer would be different if it was one day ago. Since it is the last day of the plan year, my answer is no, you cannot change the groupings now.

[wsp]

Does it make a difference if he doesn't work today? Or is that headed in a direction I don't want to go to? If he terminates today, prior to starting work, then he's not eligible to receive the contribution, correct?

I'm running into this with another client who terminates a parent with 2 months left in the year and then hires her back 2 months into the year....thus keeping her eligible for ADP and healthcare; but not for a profit sharing contribution. They take a ding in terms of coverage but since she's HCE it doesn't hurt.

[Leopurrd]

I'm not a lawyer, but....does your plan have a fail safe provision? I was told at a Corbel conference that if your plan includes the language you could execute an amendment for each year as necessary to essentially name the person stopping you from passing testing and put them in a different allocation group?

I've heard mixed things about this, I'm assuming Archimage would be in the category "against" this. Personally, since Corbel is our document provider, we have taken their advice and used this on a comp plan in limited circumstances.

Vicki

[Earl]

client who terminates a parent with 2 months left in the year and then hires her back 2 months into the year

Sounds like a 4 month vacation to me. Especially if it happened twice.

Since you could exclude the parent legitimately why would you go this route.

[Bird]

Two solutions come to mind.

First, you can do a corrective amendment and throw some money at the terminees to help pass the test (or at some of the existing employees). This contribution would be deductible in the year in which it was made. Or, if the plan has failsafe language, it should spell out the corrective mechanism and no amendment is needed.

(I do not agree that failsafe language would allow you to execute an amendment effectively reducing the son's contribution.)

Second, you could break the plan into two pieces for testing purposes: The son and a few NHCEs in one group, tested on a contributions basis (if all get the same % of pay you'll pass) and the parent(s) in another group with the rest of the NHCEs tested on a benefits (cross-tested) basis. I'm straining myself a bit here without any reference materials, but each group has to pass 410(b), and then if each rate group ratio within the plans is greater than 70%, you're done, otherwise you have to do the average benefits test.