Determination of Otherwise Escludable Emplyees (OEEs)

[buckaroo]

I have been debating a few of my colleagues for a little while on this topic and it has now come to the point where I need prove it. I have a client who has eligiblity requirements of 6 months of service. In a case like this (for any elapsed time eligiblity issue), my understanding is that employees can only be classified in the OEE group in their first year. In other words, it does not matter how many hours they work, the elapsed time is the only factor considered.

Let's use my client as an example: Calendar year plan. 6 months elapsed time. Monthly Entry. We will use the plan entry dates for purposes of determining the OEE group. Participant is hired 4/10/2006. (She is well above age 21 on her DOH.) She will be eligible for the plan on 11/01/2006. She will be in the OEE group for the 2006 test. She works 800 hours from 4/10/2006 -- 4/9/2007. Regardles of her hours, she will need to be in the statutory employees test (the regular-over 21/1) for the 2007 plan year.

This is the case beause the plan uses the elapsed time method for eligiblity and does not couht hours in any way.

My colleagues believe that because the participant does not work 1000+ hours in the anniversary year, they can be put in the OEE testing group for 2007. Then, based on the anniversary years, going forward, my colleagues believe that the participant can remain in the OEE group until they meet the 1000+ hour requirement.

Thanks in advance for any responses. A cite would be most apprecited.

[JanetM]

cite from coverage / non discrimination answer book

There are two general methods for measuring a year of service for purposes of plan eligibility: the hours-counting method and the elapsed time method.

Under the hours-counting method, a year of service is a 12-month period during which the employee completes a requisite number of hours of service for an employer. (The number of hours may not exceed 1,000.) The measurement period is referred to as an eligibility computation period. The first eligibility computation period begins on the employee's date of hire and ends on the first anniversary of that date. Subsequent eligibility computation periods may either be measured on anniversaries of the date of hire or shift to the plan year. If the computation period shifts to the plan year, however, an employee must receive credit for overlapping periods in each of the computation periods, an especially relevant rule if a plan requires more than one year of service for purposes of eligibility. [i.R.C. §410(a)(3)(A); DOL Reg. §2530.202-2(a)]

Under the elapsed time method of defining a year of service, an employee will be credited with a year of service if the employee is still employed on the first anniversary of his or her initial employment date. [Treas. Reg. §1.410(a)-7©(2)(i); DOL Reg. §.2530.202-2]

[Tom Poje]

I think the answer to your question depends on which IRS agent you are talking to.

ignoring the fact the plan is elapsed time, consider a 410k plan with immediate eligibility and monthly entry dates.

some IRS agents say the entry dates come into play, thus otherwise excludable are those who have been there less than a year. other agents lean toward the maximum statutory exclusion thus, 1 year plus a max of 6 months (ignore the plan's entry dates) I lean toward that, and every year they promise to tell us exactly how to interpret the regs on this issue.

1.410(b)-7©(3) refers to those employees 'who have satisfied the lowest minimum age and service conditions [of the plan] but not the greatest age and service conditions permitted under 410(a).

note, there is no mention of entry dates, thus, as far as I can tell, the difference of opinion among different agents.

410(a)(1) speaks of age and service

410(a)(4) speaks of time of participation (1st day of plan or 6 months after meeting requirements)

so, I would hold that even though the plan in your case is elapsed time, it could have been 1 year wait and 2 entry dates, thus anyone who never ever ever ever ever ever works 1000 hours would be otherwise excludable

but my opinion only. again, it could very well depend on which IRS person you talk to.

[Blinky the 3-eyed Fish]

I agree with Tom. My understanding of the rule is that it's in place so not to punish employers for having more lenient entry requirements. Since they could have by statute had a 1000 hour requirement and a 6 month wait for entry, those not meeting those requirements can be OE. I find it strange when some at the IRS come up with a different opinion.

[buckaroo]

JanetM, Mr. Poje, AND Blinky!! What a group!!

Since my last post, I have done some additional digging and here are a couple more thoughts:

1) From the EOB, Version 2007, p 1.158 – Actual Hours Not Relevent – “When an elapsed time method is used, the employee’s actual hours are not determined and will not affect the outcome…” (for vesting). While this only addresses vesting, it also states that four courts (and court cases) have supported the elapsed time method. I would think this would lend to not counting hours.

2) Additionally, below this section, there is another which states “An employer who is contemplating the use of the elapsed time method for eligibility, vesting and/or benefit accrual purposes should understand that part-time workers have a better chance of satisfying the applicable service requirement when the elapsed time method is used in lieu of the computation period method (where the number of hours within a computation period is important)…” This seems to say that the hours are irrelevant in the elapsed time method.

Any further thoughts or opinions?

[Tom Poje]

doesn't change my opinion at all. for otherwise excludables, I still hold that since the plan could have had a 1 year wait. so I pretend it was and anyone who is now in that would have been been excluded if the plan was written that way is excluded.

as pointed out some IRS officials agree, some don't.