Eligible for deferrals now, want to exclude in future

[John Feldt ERPA CPC QPA]

An advisor for a prospect of ours is debating that once an employee is eligible to defer into a 401(k) plan, they are always eligible to defer unless the plan is frozen/terminated, or the employee quits. The plan in question is considering excluding all HCEs from future participation in the plan: no more deferrals, no contributions, no forfeiture allocations. They are also considering excluding a fair number NHCEs to get their participant count under 100 (the plan has well under 100 with balances overall, but more than 120 eligible).

1. Assuming the amendment is not considered discriminatory, is their a problem with amending the plan to exclude certain employees from being eligible to make deferrals into the plan?

2. The document we propose is a normal nonstandardized prototype, or we could go the volume submitter route if that's really necessary. If #1 is ok, do you think such an amendment/restatement would damage the reliance on the D-Letter or advisory letter?

[JanetM]

1. Not really. You could amend the plan to only allow janitorial staff to participate. Thereby exluding all office workers. Is this to avoid an audit?

2. The DL would not cover the plan post amendment for those excluded - only those allowed to participate.

I would question the motivation behind this. Can't believe HCEs would want or allow the exclusion.

[RCK]

If those HCEs have an account balance, excluding them from future deferrals is not going to take them out of the participant counts. So it might take a few years to get your counts to wear away.

[John Feldt ERPA CPC QPA]

Yes, the desire is to avoid the expensive accountant's opinion in 2008 (they've been paying for the last coupl years and will again for 2007). It's a deferral only plan.

The goal of the plan is to allow deferrals for certain rank and file, not for any real benefit to the HCEs. The HCEs barely participate in the plan anyway due to the ADP limitations, the NHCE ADP was under 1%. So, their goal is to provide the option for most of the rank and file to continue to defer, as long as the administration of the plan does not get too costly. They want to be able to say to employment candidates that they do have a 401(k) plan.

Why they originally even set this up as they did (this and other oddities) are all issues created by the asset gatherer who originally helped them design their plan (TPA work is a secondary business interest for this asset gatherer and it shows in their lack of design acuity).

Those with account balances number well under 100 already, including any HCEs.

[RCK]

If you drive the counts down, won't you eventually drive the balances down, which will motivate the asset gatherer to raise your recordkeeping fees?

[John Feldt ERPA CPC QPA]

RCK: We're driving the 5500 count down by excluding a bunch of people who already have no balance anyway since they've never deferred. We do not expect that action to lower the overall assets of the plan.

Our recordkeeping fees are much lower than the asset gatherer was charging. The new platform is designed for assets of this plan's size, unlike the platform of the prior provider. Win-win. Our recordkeeping fees will not be based on plan assets for this client, so balances are not a concern for us admin folks (but the assets will be a concern for the financial advisor/broker so they can get paid adequately for the employee education services that they will provide). In this case, the majority of our admin fees will be based only on the number of participants with balances (instead of being based the number of eligible ppts) - so, much much lower fees overall. ok, end of boring paragraph...

[david rigby]

Why they originally even set this up as they did (this and other oddities) are all issues created by the asset gatherer who originally helped them design their plan (TPA work is a secondary business interest for this asset gatherer and it shows in their lack of design acuity).

I'm shocked! Shocked!

Sounds like this sponsor should have a different type of plan.

[John Feldt ERPA CPC QPA]

Yes, what I thought was very interesting (maybe shocked by) was how they did a small discretionary match (which they contributed) in the first year, which was subject to vesting, and then forfeitures were allocated to all eligible participants. The number of people with balances jumped from 70 people (those deferring) to over 150 people with balances, most of them 3 or 4 dollar balances. How many other plans have been designed like this?

[SMB]

If truly NHCE-oriented - what about a payroll-based IRA program? In my experience, there are not many NHCEs who defer more than the IRA contribution limit.

Just a thought...

[Guest WWPDRC]

Am I missing something? I thought that once a participant, always a participant until you severed employment and if you had a benefit, until such time that you received your benefit in full. Don't see how you can kick someone out of the plan once they're in regardless of their account status. I do agree that they can be excluded from future allocations if plan excludes them properly. Of course, still have to be weary of top heavy requirements.

[Blinky the 3-eyed Fish]

Eligibility is not a protected benefit and therefore can be taken away.

[BG5150]

As long as you pass coverage, you can pretty much exclude any group you want.

You'd have to come up with some sort of common denominator of those EE's you want to exclude and hope no one in that group defers and would, thus, no longer be eligible to contribute to the plan.

I think the "once you're in, you're in" theory comes from plan provisions that say all service with the ER is counted. So if someone who was eligible before she terminated, when she is rehired, she has no eligibility requirements to satisfy to start re-participation (except that of being in an eligible class).

[Guest GordyK]

Blinky: The 5500 instructions for the participant count include currently employed individuals who are earning or retaining credited service under the plan.

I'm not sure what credited service is. But, if a participant was otherwise eligible, but did not defer, he would have earned eligibility service, vesting service, accrual service, etc. Would someone not earn some of these credits even if excluded from participation?

[Blinky the 3-eyed Fish]

If excluded from the plan, they are not earning credited service under the plan.

[Guest GordyK]

Blinky:

What about "retaining" credited service? If someone was eligible in the past and earned vesting service, now we exclude him, somehow you wipe his vesting off the books?

Does excluding a newer employee from participation also automatically exclude them from earning years of service for vesting? If not, are they not earning credited service under the plan? If yes, how do you handle an employee who moves from a union position (eligibility excluded under the terms of his employer's qualified plan) to non union position with the same employer that has a qualified plan?

[Blinky the 3-eyed Fish]

My last post was short and unclear. Part of credited service is vesting service and of course that continues to accrue if the person is employed but excluded from the plan.

No you don't wipe away the vesting service they earn. Additionally, if they continue to work for the employer, they continue to earn vesting service.

I went and looked up the 5500 wording and to be an active participant the individual must be currently in employment covered by a plan. Thus, if you exclude that individual, they don't meet that criterion. Active participants also include nonvested former participants who are earning or retaining credited service. However, if the person has no balance, they aren't earning service toward anything and are not participants any longer as stated in the next sentence on the instructions.

The eligibility and vesting work the same way by simply excluding someone as the way it works if a plan covered only non-union employees and a person went union. They no longer are an active participant. They continue to earn vesting credits. If they have a balance in the plan, they are now terminated vested participants. If they have no balance in the plan, they are no longer participants at all.

Does that help?

[Guest GordyK]

Sorry, doesn't help.

In your first two paragraphs you indicate that when vesting is earned it contines to accue even if the employee is excluded from the plan. In response to my question you say that vesting in not wiped out.

The 5500 instruction say that paticipant includes someone who is earning or retaining credited service. You say that credited service includes vesting. You also agree that someone who continues to work for the employer continues to earn vesting.

I can't follow your logic here. How can you say that excluding someone from participation excludes them from being a participant when they are earning or retaining vesting credits which is one of the criteria for being a participant? Sure, they can't contribute, they will not receive an employer contribution-ok they have not balance. They have vesting credits.

How does someone who is excluded not meet the "...currently in employment covered by the plan". He works 1,000 hours. You agree that his vesting increases and that vesting is credited service. How is his employment not covered by the plan? Just because they don't have a balance doesn't mean that they not earning service toward anything. If they have the hours they earn vesting credit.

My union example was to show that vesting for the prior time counts. Forget that. Please explain to me how someone that continues to earn or retain service credits under the plan (specifically vesting) is not a participant per form 5500 instructions. How, by excluding that individual, they do not meet the critera?

[Blinky the 3-eyed Fish]

Your hang-up is employment covered under the plan. Recall the instructions that states "active participants include any individuals who are currently in employment by a plan and who are earning or retaining credited service under a plan.

You asked "How does someone who is excluded not meet the "...currently in employment covered by the plan".", because they are earning vesting credits. But that is not the criteria for "in employment covered under the plan." This instead is referring to those who are eligible to participate in the plan (i.e. not excluded).

Try asking yourself why would the instructions say AND if the first stipulation was automatically satisified by the second? Then I am hoping this will make more sense.

[Guest GordyK]

Sorry, Blinky. I think you are making things up. What then is the criteria for "employment covered by a plan"?

I don't see that you really answer the question. Lets say you have a full time employee in an excluded class with three years of service. Is this employment covered under the plan? Are these hours what the plan would take into consideration to determine if he were earning service credits under the plan?

Let's say you have four eligible employees including the above employee. Is she currently in employment covered by the plan (410b)?

Or are you saying that because the employee is excluded the hours don't count for purposes of "employment covered by a plan" but you do count them for vestng credits (if hours =or> the plan requirement)?

If my employee does not meet the requirements for being a participant please give me a specific reason, example or something tangible. Telling me what my hang up is doesn't add much to the conversation. Please don't answer my question with a question. Give my your citation for "...currently in employment covered by a plan".

The reason there is an "and" in the instructions is to indicate there are two criteria to be met. How are they not met? The first stipulation is not automatically satisfied by the second.

[Blinky the 3-eyed Fish]

Sorry, Blinky. I think you are making things up. What then is the criteria for "employment covered by a plan"?

I don't see that you really answer the question. Lets say you have a full time employee in an excluded class with three years of service. Is this employment covered under the plan?

I answered the criteria in my last post. To the second question, the answer is no.

Are these hours what the plan would take into consideration to determine if he were earning service credits under the plan?

Vesting and eligibility credits, yes.

Let's say you have four eligible employees including the above employee. Is she currently in employment covered by the plan (410b)?

She is not an excludable employee and thus is in the denominators of the 410(b) calculations, yes.

Or are you saying that because the employee is excluded the hours don't count for purposes of "employment covered by a plan" but you do count them for vestng credits (if hours =or> the plan requirement)?

Yes.

If my employee does not meet the requirements for being a participant please give me a specific reason, example or something tangible. Telling me what my hang up is doesn't add much to the conversation. Please don't answer my question with a question. Give my your citation for "...currently in employment covered by a plan".

Sigh. I won't spend too much time on this. How about this example, related employer with 2 plans. Vesting and eligibility for both plans count while performing service for either related employer by statutory rule. Is each person who met the eligibility requirements a participant in BOTH plans? No. Same question if union and non-union. Same question if in an excluded class. It's the same!

The reason there is an "and" in the instructions is to indicate there are two criteria to be met. How are they not met? The first stipulation is not automatically satisfied by the second.

Huh? Your position is that vesting service is credited service and vesting service continuing to accrue means that they are in employment covered under the plan, then how is the first not met by the second in your world? What did I mis-state?