Plan w/o HCEs - testing issues?

[Guest Benefitsrock]

Can a plan in which no HCEs participate exclude some NHCEs from participating and still pass testing? The benefits provided to the NHCEs would be nondiscriminatory. I would appreciate anyone's thoughts.

[Mike Preston]

Yes.

[Guest Benefitsrock]

Thanks. While I understand that all of the tests compare NHCEs to HCEs, I am concerned I'm missing something. My guess is that I can't find any confirmation of the ability to discriminate against NHCEs employed by the same company because it is rare that a plan doesn't include HCEs. Any suggestions where I can find something in black and white confirming my thoughts?

[david rigby]

Not sure you will find such a cite. The general explanation is that the non-discrimination parts of the IRC and regs are devoted to minmizing discrimination in favor of HCEs. Thus, you can discriminate against some HCEs, or against some NHCEs, as long as you do not discriminate in favor of the HCE group.

[Mike Preston]

Paranoid, huh?

You'll do fine in the pension world. A very good trait to have.

You should be able to find something on point.

The place that is most likely to bear fruit, although it may not do everything you are looking for (and what would, my paranoid friend?) is in the area of 401(k) ADP/ACP testing.

There are those who were worried that a plan with no HCE's would have an HCE ADP of zero divided by zero. The more mathematically inclined believe that number to be undefined. The less mathematically inclined believe that number to 1 (or, 100%). With an HCE ADP of 100%, very few plans would pass the non-discrimination test!

Hence, there is a specific provision in the regulation that says a plan that covers only NHCE's automatically passes the ACP and ADP tests.

Does that wet your whistle or whet your appetite?

[Guest Benefitsrock]

Okay, okay, I'm paranoid! It just doesn't seem right to me to be able to exclude certain employees. I'm off to find the regulation...

[Mike Preston]

Well, the regulation is reversed. It specifies that if there are no NHCE's, then the plan is deemed to satisfy the ADP/ACP tests. Evidently, the regulation drafters felt that it was clear in the event of a plan that covers solely NHCE's.

Sorry it isn't what you are looking for.

I suppose "trust us" doesn't cut it for you, huh?

[Tom Poje]

on the other hand, if you have some NHCEs who receive no contribution because they are excluded for whatever reason and other co-workers who receive a contribution, then you may have problems within the ranks, 'good' workers who quit, etc.

for coverage purposes see 1.410(b)-2(b)(6) "plans benefitting no HCEs"

[Guest Benefitsrock]

Thanks. The pool of NHCEs consists of different types of people. One group wants a 401(k) (and we are willing to set it up for them) and the 3 other groups don't want a plan (they would rather have the company pay them slightly more than participate in a plan - crazy I know!) so fortunately we don't have to be concerned with unhappy employees.

[PLAN MAN]

Sounds like this can be settled with good plan design. What about new hires? If you exclude certain divisions or locations now, will it be clear that any employee hired into one of the excluded groups will not be eligible? If the excluded group is large, you may have discrimination problems if HCEs participate at a later date.

[BG5150]

Wait a minute? These people want to be paid more to now have a plan and not defer? That is just plain silly. I could understand if the people WITH the plan would want to be paid more (to offset some of the deferrals). or would they rather get more in a paycheck than have a match or PS?

I say screw it. Make everyone eligible. And if the ER wants to pay these other people more, so be it.

[david rigby]

What about new hires?

New hires are easy. It is transfers that will be the problem.

[CTipper]

if crossing 100 participants and the ensuing audit isn't an issue, why are you excluding anyone?

the HCE's don't have to be exluded by plan design to pass non discrimination testing. They just have to be defer zero and you don't have a testing issue.

you only have to exclude the HCEs if you're going to exclude NHCEs. This is because of coverage not discrimination.

heck, since 401(a)(26) went away 10 years ago for DC plans, you could set up a plan for each participant, but that's a different story.

Christopher