Excluding a Participant from future accruals

[Guest sueczer]

This is a 412i plan , but the question relates to any type plan. We have an employer who wants to amend their plan document to exclude a current participant from the plan. This participant was eligible to participate in the plan 1/1/05 and accrued a benefit in 2005. They will not accrue their benefit for 2006 until they complete 1000 hour of service. Ideally, the client wants to exclude them from the 2006 accrual, but will be willing to start the exclusion in 2007.

This participant is close to being a highly compensated employee due to the compensation level. The plan would pass 410(b) and 401(a)26 excluding her, whether or not she is highly compensated. She is the only employee in her particular job classification.

The issue I am having with this...can you exclude someone once they've become a participant? Would we just amend the plan to exclude her job classification for future accruals?

[SoCalActuary]

As long as you are aware of the consequences, you can cease future accruals for this participant.

You must document it, notify the participant properly, and take care to keep the plan in compliance.

You do have to continue vesting provisions if the employee does not decide to quit.

If you did this because the participant is "too expensive", you might get an employee lawsuit.

In that case, you might be under less burden if the employee was simply released.

[david rigby]

You must document it, notify the participant properly, and take care to keep the plan in compliance.

And make sure you get the proper legal advice on how to accomplish this.

[Mike Preston]

In that case, you might be under less burden if the employee was simply released.

Egads. Something tells me this comment was in a different form in SoCalActuary's head and it morphed into the above somewhere between the brain and the keyboard.

Under no circumstances can you release the employee predicated on their potential accrual as being too expensive.

That is, on its face, a violation of ERISA 510.

Don't do it.

But whatever you decide to do, PAX has the right idea.

[mwyatt]

Watch out for those Google spiders...

[SoCalActuary]

What was I thinking???

Thanks Mike for pointing out the ERISA issue.

The plan sponsor is complaining about the cost of the employee.

Either they fix the plan design (as suggested), or

adjust the person's compensation for the economic reality of the benefit cost, or

pay the cost of the benefit.

If they get sued for age discrimination, the cost of the benefit will be the least of their troubles.

[Guest mjb]

what part of 510 is violated? The courts allowed a plan to eliminate health benefits for employees with AIDS. Under your logic an employer could never reduce benefits for employees because it would violate 510.

[Mike Preston]

what part of 510 is violated? The courts allowed a plan to eliminate health benefits for employees with AIDS. Under your logic an employer could never reduce benefits for employees because it would violate 510.

You aren't reading the thread very carefully. One can eliminate benefits without violating 510. However, dismissing an employee predicated on the expense of the impending benefit is such a clear violation of 510 that I'm presuming you just missed this point.

[Guest mjb]

were did I charaterize the termination of the employee to prevent paying an impending benefit? This is you spin on what is occrring.