Excluding eligible employee

[fiona1]

The EPCRS (Rev Proc 2006-27) has an example of an eligible NHC not given the opportunity to defer from 1/1/03 to 9/1/03. This is Example 4 on page 71. In this example, the NHC defers $400 from 9/1/03 to 12/31/03.

To determine the corrective QNEC, it says to take 50% of the NHC's missed deferrals. This is determined by taking the 2003 NHC ADP (3%) multiplied by a pro rata of the NHC's 2003 compensation (8/12 of the compensation). The corrective QNEC comes out to be $360 in this example.

That is all straight forward enough.

Here is my question though. When preparing the 2003 ADP test, how is this participant included?

1. Are they left out all together?

2. Are they included, but only with compensation and contributions from 9/1/03 to 12/31/03?

3. Are they included with the full year compensation but only contributions from 9/1/03 to 12/31/03?

Thoughts?

[Guest TooMuchFreeTime]

For testing purposes, the employee would need to be included with their full year's compensation. The simple reason is that there is no statutory authority for excluding them from coverage. The requirements of nondiscrimination testing are independent of actual plan operation. For example, where a plan covers statutorily excludible employees (less than a year of service, under age 21), you are not required to test them with the rest of the population. The fact that they, operationally, actually participate with the rest of the employees doesn't change this. Similarly, where an employee, by law, cannot be excluded, the fact that they operationally did not participate wouldn't allow you to ignore them for testing purpoes.

Besides, you'd be hard pressed to make an argument that the plan is nondiscriminatory when it impermissibly cuts out certain participants.

At that point, the only question becomes whether the corrective contributions are included - I'm not sure on the answer there.