Dual Eligibility

[Kimberly S]

Assume you are using a standardized prototype - can you ever amend the eligibility to be more strict than it was at the outset without encountering 410(b) issues? The question has come up regarding the definition of dual eligibility. Having a document with two eligibility provisions written in, ie waiver at January 1 and one year for all others, seems to be a clear "dual" provision. Do the same rules apply to amendments?

[ERISAnut]

Could you be more specific on your question. Cannot determine a fact pattern. You are allowed to amend to change eligibility, since eligibility is not protected from cut-back. But, what exactly are we trying to accomplish.

[Kimberly S]

We're hearing rumors that an eligibility amendment, like the dual eligibility provision, can create coverage testing issues. Since we design our plans with the intentnion of having 100% coverage because we do not have the software or staff to do 410(b) testing, we're trying to figure out if allowing such an amendment will be a problem.

[austin3515]

No it won't. The only people not covered by the Plan will not have satisfied the plan's eligiblity requirements. Erego, no coverage issue.

[Kimberly S]

That's what we always thought, but now we're being told that we have to test using the most liberal of the 2 requirements as the eligibility for everyone until such time as everyone has met the stricter requirements even if they entered years earlier. That sounds like a nightmare!

[Guest Sieve]

When testing for 410(b) when there are dual eligibilty provisions, you must use the most liberal requirements to determine if 410(b) is met. Don't know if that applies when everyone at a certain date has no eligibility requirements and new hires must meet minimum requirements. I suspect so.

Also, the timing of the amendment could cause 401(a)(4) issues when stricter eligibility provisions eliminate from particiaption some employees who had been in the Plan previously.

[ERISAnut]

Okay, it makes sense now since you are on a standardized adoption agreement. When properly written, it does not leave the door open to 410(b) failure since all non-excludable employees of all employers within the related group are covered (be each employer inside the controlled or affiliate group completes a co-sponsor adoption page).

An amendment from immediate eligibility (or any period less than 1 year of service) to provide for a more restrictive eligibility requirement (up to 1 year of service) would not constitute a failure of 410(b) in any way. Early entrants (meaning employees who are eligible for the plan but have not met the 21 & 1 requirements under 410(a)(1), would be able to get tested separately with respect to 410(b) and would all constitute NHCEs. Also, as an option, if there were the child or parent of an owner who was hired recently, then that individual could be tested with the employees who have actually met the 21 & 1 conditions.

This rule exists primarily to circumvent any perceived issues with your situation. However, it's original intent is to remove any obstacles from employers deciding on whether to allow immediate entry into the plan, and encourage employers to do so. There aren't any coverage or cutback failure for amending, prospectively, to apply a more restrictive eligibility requirement (as long as it doesn't exceed 410(a)(1) thru 410(a)(4)).

A little long winded, but I cannot imagine a situation where this would be a problem with coverage.

Sieve jumped in ahead of me. Would be good to consider applying your provision to only those employees hired on or after the amendment date. This will avoid the need to analyze the amendment for 401(a)(4) on the amendment timing issue.

[Kimberly S]

We always allow anyone who was in the plan to stay in the plan, and apply the amended provisions only to people hired after the amendment. If I'm reading your comments right, it sounds like we should be OK.

the other advice we received suggested that if the plan started with 3 months of service and later wanted to amend for 1 Year of Service, anyone who has never met the 1 Year of Service would trigger the need to test based on 3 months of service each year until they have met the 1 Year of Service. Since that might include an HCE, we were concerned with this interpretation.

[ERISAnut]

the other advice we received suggested that if the plan started with 3 months of service and later wanted to amend for 1 Year of Service, anyone who has never met the 1 Year of Service would trigger the need to test based on 3 months of service each year until they have met the 1 Year of Service. Since that might include an HCE, we were concerned with this interpretation.

No. You would merely test on whether you met 21 & 1 or not. In the event you have employees who remain eligible (through grand-fathering the provision) but never reach 1 year of service in subsequent years, then they will be tested separately. However, the HCEs will be allowed to get tested with the 21 & 1 employees.

[Kimberly S]

Thanks!

[Kimberly S]

For what it's worth, our attorney has now weighed in saying that in this situation you are not permitted to use otherwise excludables as suggested by some earlier posts. He believes that the only way to avoid the 401(b) issue is to apply the stricter eligibility to everyone and essential remove those folks from the plan going forward.

With advice from him and Sungard presenters that agrees, it appears that will be our new position.