Includable in 2005 Dec ye ADP test?

[Beltane]

I brought this issue up partially before, but am hoping to get a survey of responses and reasons from the field here to get a more direct answer.

Company has a 401(k) plan with a December year end. There were 3 eligibles who did not work any hours in 2005 but, because of the 2 weeks in arrears payroll system they are on, received checks on the Jan 15, 2005 payroll, thus received W-2's. Would you include them in your 2005 ADP test?

This question was posed after session to an IRS official at an ASPPA conference earlier this year, and there response was yes, you include them..

Please, if you could, post your feelings and explanations. Thanks ahead of time for any responses!

[Nate X]

If the employees were allowed defer on their final paycheck, then they would NOT be excluded from the 2005 tests.

If they were NOT allowed to defer on their final paycheck, then they can be excluded from the 2005 test.

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From Notice 2004-84 (December 27, 2004):

"Guidance regarding the ability to make deferrals with respect to post severance compensation is expected to be issued soon. "

[Beltane]

Not be excluded = would be included in the test.

ok, score is 1 to 0 in favor of including them in the test.

Anyone else have any comments?

Anyone know if this guidance from the Notice 2004-84 quote has been issued yet?

[Guest Pensions in Paradise]

Per The ERISA Outline Book - "If the right to compensation is earned but not paid in the limitation year, because of the timing of pay periods, and the payday for such compensation occurs in the "first few weeks" of the next year, the compensation may be included for the limitation year in which it was earned. See Treas. Reg. §1.415-2(d)(5)(ii)." Chapter 1, Part A.7

[Beltane]

Per The ERISA Outline Book - "If the right to compensation is earned but not paid in the limitation year, because of the timing of pay periods, and the payday for such compensation occurs in the "first few weeks" of the next year, the compensation may be included for the limitation year in which it was earned. See Treas. Reg. §1.415-2(d)(5)(ii)." Chapter 1, Part A.7

I'm not sure this is the issue - i believe the issue is whether or not these employees are 'eligible employees' under the 401k testing rules. This cite is a de minimus exception to the definition of compensation for 415©(3), which disallows the use of accrued compensation as part of the definintion.

I have no problem using their W-2 compensation in the test, but it is correct to include them in the test even though they did not perform any employment service in the year of the test? I'm getting the feeling this is administrative choice which must be consistant from year to year, and not subject to annual discretion.

Score still 1 - 0, in favor of including them.

[Beltane]

1.401(k)-2(a)(4) lies out the elective contributions to be taken into account. Specifically, it states: "An elective contribution is taken into account in determining the ADP for an eligible employee for a plan year or applicable year only if each of the following requirements is satisfied-(A) The elective contribution is allocated to the eligible employee's account under the plan as of a date within that year...."

I would say a 401(k) deduction is 'allocated'as of the paydate its deducted [definition of allocate: 'set apart for a specific purpose']. So if someone deferred into 2005 and termed 12/31/04, its allocated in the 2005 plan year. Meeting the other conditions of the above cite, this deferral would be taken into account in their ADR for 2005. They have a 2005 elective contribution, and only "eligible employees" may make such contrbutions - so the contributor must be an 'eligible employee for 2005' and is in the 2005 ADP test.

Score 2 - 0

[austin3515]

Bring em in!!!

[RCK]

Since we're essentially voting here:

I'm assuming that for everyone else, you included those weeks' earnings and any deferrals from that comp in the 2005 test. So you do that here too.

[Beltane]

Since we're essentially voting here:

I'm assuming that for everyone else, you included those weeks' earnings and any deferrals from that comp in the 2005 test. So you do that here too.

Yes, very good point, thanks.

[Guest Judy S]

The section of the ERISA Outline Book quoted by Pensions in Paradise didn't really address this issue. It is addressed in detail in Chapter 11, Section VI, Part B5 of the 2005 edition.

[Beltane]

The section of the ERISA Outline Book quoted by Pensions in Paradise didn't really address this issue. It is addressed in detail in Chapter 11, Section VI, Part B5 of the 2005 edition.

which says....???

[Jim Chad]

I see why she didn't type it all in. The answer runs 4 pages in the 2006 version (11.47 to 11.50). I highly recommend reading it all. I would summarize it this way. Within 2 1/2 months you can let the seperated employee defer. If the normal practice is to let the seperated employees defer out of the final paycheck, then you would include them. If the normal practice is to not allow them to defer because they are no longer an employee, you would exclude them from the ADP.

Additional thought:

If they are normally not allowed to defer from final paycheck, than anyone terminating mid year would hurt your ADP test because turnover would be higher among NHCEs.

Does anyone have an opinion on how this should usually be done. My guess from looking in my crystal ball is that it would help more to exclude than it would hurt?

One other question: I use microsoft internet explorer here. Is there any sort of a spell check?

[Guest HiKidsImASrPensionAdmin]

One other question: I use microsoft internet explorer here. Is there any sort of a spell check?

Dowload the Google toolbar. There is a spell check on that.

[Beltane]

I see why she didn't type it all in. The answer runs 4 pages in the 2006 version (11.47 to 11.50). I highly recommend reading it all. I would summarize it this way. Within 2 1/2 months you can let the seperated employee defer. If the normal practice is to let the seperated employees defer out of the final paycheck, then you would include them. If the normal practice is to not allow them to defer because they are no longer an employee, you would exclude them from the ADP.

Additional thought:

If they are normally not allowed to defer from final paycheck, than anyone terminating mid year would hurt your ADP test because turnover would be higher among NHCEs.

Does anyone have an opinion on how this should usually be done. My guess from looking in my crystal ball is that it would help more to exclude than it would hurt?

One other question: I use microsoft internet explorer here. Is there any sort of a spell check?

Thank you, from what I've seen it is the normal practice to allow participants to defer on their last paycheck - after all, that last paycheck meets the document's definition of 'compensation' for computing accrued benefits.

I'm convinced, herein, they should be included and, on audit, the W-2's would tie to the ADP test.