Testing with a terminated participant

[Guest slulla401k]

I have a participant who was terminated 12/31/2005 and I'm doing testing for 2006. He got one last paycheck in 2006 for the first pay period in 2006, where he made $190 in deferrals and got a $90 safe harbor match. Do I include him in 2006 testing and use 01/01/2006 as his termination date or ignore him for 2006 testing?

[stephen]

The ERISA Outline book says:

Chapter 11: 401(k) and 401(m) Testing - Section VI (Performing the ADP test): Part B (Who are the eligible employees?) page 11.49-50

5.c.1)d) Crossing over plan years (final paycheck issued in subsequent plan year). To complicate matters, suppose the final paycheck is issued in a different plan year from the one in which the individual’s employment terminated. If a terminated employee is eligible to defer from the final paycheck, as described in 5.c.1)c) above, does this make the individual an eligible employee for the plan year in which that paycheck is issued? In the example in 5.c.1)a) above, suppose Elton’s termination date is December 20, 2007, and the final paycheck is issued on January 2, 2008. If Elton is eligible to defer from the January 2,

2008, paycheck, does that make him eligible for the 2008 plan year or does the right to defer from the final paycheck relate to the 2007 plan year?

Approach #1: eligibility relates to year of termination. If eligibility to defer from the final paycheck relates to the plan year of termination (2007 plan year, in Elton’s case), then the issuance of the paycheck in the next plan year would not cause the employee to be treated as an eligible employee for the plan year in which the check is issued (2008 plan year, in Elton’s case).

Approach #2: eligibility relates to year of final paycheck. If eligibility to defer from the final paycheck relates to the plan year of the final paycheck (2008 plan year, in Elton’s case), then the plan would include the terminated employee as an eligible employee for such plan year for ADP testing purposes. It would be inconsistent, however, to treat the employee as eligible to defer for the plan year of the final paycheck, and then disregard the individual for ADP testing purposes on the basis that he or she performed no services for that plan year, unless the Treasury or IRS create some exceptions in this area.

[Tom Poje]

by the way, for plan years beginning 1/1/2006 the regs say the document should be pretty specific how to handle such characters see 1.401(k)-2(a)(4)(i)(B)(2) "...only if the plan provides..."

regardless of that since you are talking 2005, you have to treat anyone else in a similar manner

e.g. if you include this ee in 2006, then someone who terminated on the same date and did not defer would also be included.

[Blinky the 3-eyed Fish]

I don't like the use of Sal's option 1 unless you account for that contribution and salary in testing in the year of termination. If you don't account for those dollars, you have contributions that go untested and that bothers me.

[Below Ground]

I suggest that if a person had pay during the testing year from which they could defer to the plan, that person was eligible to defer for that year and should be included in the testing.