18 Month Permissive Disaggregation

[RCK]

I believe that it is pretty common to use permissive disaggregation in ADP/ACP testing, where the disaggregation is done using the twelve month rule to determine the excludable group.

I also understand that there is a possibility of applying an eighteen month rule to determine the excludable group. The theory behind that of course is that someone can be excluded from participation for 18 months by having a one year wait and and dual entry dates (six months apart).

So the question is whether anyone is actually using the 18 month rule as a bais sfor disaggregation.

We seem to be flunking by a few basis points with the 12 month disaggregation, and since we have over a thousand HCE's I would rather not have to do refunds or the dreaded bottom up QNEC. Thoughts?

[Tom Poje]

it is not really '18 month'.

the maximum entry entry dates are

earlier of

1st day of the plan year

6 months after meeting eligibility. code sec 410(a)(4)

thus, someone hired 9/1/04 would have to enter 1/1/06 of a calendar year plan not 18 months after 9/1.

or put another way, an ee hired in the second half of the plan year would enter the first day of the plan year. an ee hired in the first half of the plan year would wait 18 months.

the IRS has promised clarification on this, but has repeadetly at ASPPA conference that you (should) ignore a plan's entry dates and follow these guidelines when applying the rules for 'otherwise excludables'. of course comments at conference don't necessarily reflect an actual position, but I think in this case they are a good rule to follow.

[rcline46]

The Final 401(k) regs state that you must use the plan's entry dates once the 12 months/1000 hour requirements have been satisfied - ie - daily, monthly, quarterly, etc. Remember that these regs were published in Dec of 2004 and all plans must comply for plan years beginning after 12/31/2005.

Note that the IRS auditors are trying to enforce this during plan audits for the 2004 year.

[austin3515]

I just looked in the regs and don't see that mentioned anywhere...

Are you sure that's the case? I know there has always been debate whether you had to use the Plan's entry dates or the statutory maximums, but I wasn't aware that it was settled?

[rcline46]

A plain reading of 410(b)(4)© and 1.410(b)-6(b)(1) leads one to the conclusion that the plan entry dates prevail for describing who is statutorially excludable.

[Tom Poje]

I can not derive such conclusion that plans entry dates have a bearing.

1.410(b)-6(b)(3) clearly states employees who would be excludable but for the fact the plan does not apply the greatest permissible age and service conditions may be treated as excludable employees ['otherwise excludable']

410(a)(1)(A) clearly states this is age 21/1 year of service, and 410(a)(4) adds 'Time of participation' being earlier of first day of plan year or 6 months after satisfying the requirements. my plain reading says I could have excluded people (e.g. hired 3/3, so 18 months later = 9/3 following year) - hence the idea of greatest permissible age and service conditions.

Q12 at the 2004 ASPPA conference specifically asked if the employer must use the plans entry dates or the maximum permissible under 410(a)(4). the informal response was maximum entry dates are permissible.

similar response have been given at other conferences.

[austin3515]

Those regs have not been updated in a long time. The debate still continues. You should check the ERISA Outline Book, as there are at least a couple of pages dedicated to it.

I can tell you that Relius (from Sungard Corbel) doesn't even give you the option to use plan entry dates - rather, it applies the so-called "18 month rule."