What? Cannot freely exclude highest paid NHCEs? Even if 410(b) and 401(a)(4) pass?

[John Feldt ERPA CPC QPA]

I was about to set up a plan to cover 2 owners and about 10 NHCEs, excluding 2 NHCEs, when I read something from the Relius website yesterday, and I became troubled. These 2 excluded NHCEs are the 2 highest paid NHCEs, even though they were both hired in 2007. What I read, under a paragraph entitled "Volume Submitter Plans" said that the IRS is approving the EGTRRA documents with some warnings, and, I quote "In addition, in designing a classification, the employer must not limit participation to only the shortest service and lowest paid NHCEs while excluding the other NHCEs." Then, to really make me stand up and yelp, it said further "... even if the plan can pass coverage and pass the general nondiscrimination test." And as if I hadn't had enough already, it further stated "... such a design under a prototype would not be 'reasonable' under the reasonable classification requirement. Thus the IRS did not require a similar 'warning' in the prototype." Wimper ... please stop ...

Uncle. Has the IRS put a full Nelson (wrestling term) hold on our necks here? Can we even set up a plan like I describe anymore?

[ak2ary]

Its not good..In fact, its bad (which is another word for not good)

Keep in mind that the warning is for pre-approved documents and does not place any restrictions on individually designed documents. I believe its meant to enforce in some way the anti-abuse provisions in 401(a)(4). In your case, you are not covering " only the shortest service and lowest paid NHCEs while excluding the other NHCEs". In fact rather than excluding the other NHCEs you are covering more than necessary....(albeit just one more than necessary if you don't have a reasonable class).

I have run into three plans where the eligible class of employees was described in the document as "5% owners and the Low-paid Group of employees"...the Low Paid group was defined as a process...line up all nhces in increasing pay order for the year, add the lowest paid employee to the plan, test the plan for 410(b) and 401(a)(4)...if it fails, add the second lowest paid employee and so on and so on. I would imagine that they would like to preclude preapproved status for this design

[david rigby]

Don't you have to return to basics, and ask how you "designed the classification"?

[John Feldt ERPA CPC QPA]

Thanks for your response, Tom.

So, if my example changes where the 2 highest paid NHCEs both are managers, and they both had longer service, then this design would not be allowed in a pre-approved EGTRRA document?

If that's done in an individually designed plan, how would that change anything, other than the document language being compliant - would the IRS be able to say the design is not allowable once they review the facts and circumstances?

Back to basics: Same example as above (exclude 2 mgrs with long service and high pay), suppose the class is 'EGTRRA plan document restatement managers who are not HCEs' and the business reason is: to retain and/or attract that employee, the pay level is the driver, not the retirement plan benefits, would that possibly be an acceptable classification that could be excluded from the plan if 410(b) and 401(a)(4) are satisfied, or will any such excluded class now be subject to the whim of the IRS to say "eez alright" or "eez no good" ?

[ak2ary]

I would argue that managers is a reasonable business classification and, as such the goal was not to ...

limit participation to only the shortest service and lowest paid NHCEs while excluding the other NHCEs...

and you're fine, in any document. The problem appears to be exclusions by name who happen to be oldest or highest paid NHCEs or exclusions like I described earlier where you only cover the minimum number you need to and guarantee its the cheapest group by pay.

Nevertheless, I agree its stupid, but again, they limit it to pre-approved so that if you want to use this language, you have to get an individual letter so they can look for abuse. Otherwise a word for word adopter of a vol submitter using the language I described earlier could say, "whaddya mean this is abusive...I have a DL on it."

[John Feldt ERPA CPC QPA]

many thanks!