Excludable Employees

[Guest J Samuelson]

I have a question on a possible new 401K plan. A corporation (temp agency) has 16 permanent employees plus about 50 temp positions. The temps do normally work over 1,000 hours. If the owners of the corp (as the only HCE) elect out of the plan, can the temps be excluded? Point me in the right direction and I can do the research if this is feasible.

[Guest gpr]

You have to pass coverage (410b) for each component, and based on the numbers you provide, you don't make it, even excluding the HCE's.

What is the objective of the plan? You can give everyone (including the temps) the opportunity to make 401(k) deferrals and realize the current tax benefits without providing an employer contribution (assuming employer cost is the reason they desire to exclude the temps). Is there another reason they want to exclude the temps?

[Tom Poje]

if no HCEs 'benefit', a plan passes coverage.

see 1.410(B)-2(B)(6).

However, if an ee elcts out, for purposes of 410(B) he is considered benefiting for the 401(k) and 401(m) portion. He is considered includable and not benefitinf for the 401(a) portion. Thus, if you exclude them (the HCEs) the plan will pass, but if they elect out, the plan will fail.

[Guest RARogers]

You have the coverage issue , but more fundamentally you also have a 410(a) issue. 410(a) says you can't require an employee to be credited with more than 1000 hours in a 12 month period as a condition for eligibility. This has been interpreted by the IRS as not allowing a plan to exclude employees on the basis that they are part-time, temporary, seasonal, etc. - these are all deisgnations based on the employee's scheduled or expected employment. The only way you are supposed to be allowed to exclude someone because of their work schedule is the 1000 hour standard. Under IRS standards a temp who works more than 1000 hours isn't really a temp - if you exclude the person on that basis it's a subterfuge of the 1000 hour standard and in addition it's an improper use of discretion - after all what's the difference between a person who works 1000 hours a year who is a temp and one works 1000 hours a year who is not a temp - the only difference is that the employer says one is temp and one is not.

People have tried to work around this with other types of classifications (calling the excluded class something other than temps - such as "contract employees") or with a failsafe approach - you're excluded if you're a temp, but if you actually have 1000 hours we won't consider you a temp.

[LCARUSI]

I agree strongly with RARogers. What you want to do is EXACTLY what the IRS does not want you to do (for reasons of 410(a)).

[Guest John Smith]

I believe there is some confusion arising from J. Samuelson's use of the terms "permanent employee" and "temp". This is my understanding of the situation:

An employer, whose business is the leasing of employees, has 66 common law employees. 16 of the employees work in the corporation's offices. Their job responsibilities are management, billing, coordinating with recipient companies, etc. One of the 16 employees is the owner and an HCE. The other 50 employees work outside of the office as leased employees for other companies.

Given these facts, cannot the employer exclude as a job class the group consisting of the 50 employees? (Granted, the HCEs would have to be excluded for the plan to pass coverage.)

[Guest FredReilly]

As I recall the reg. and the field directive which was issued five years ago discuss only "part time" employees. The issue is whether the basis for exclusion is really an age or service condition. Where part time is defined as a certain number of hours worked per pay period, the condition violates 410(a). I have been able to successfully argue the "temporary employee" has a different condition for exclusion (hired only for a specific project and could work any number of hours more or less than the 1,000 criteria). It only seems to boil down to the semantics of the exlcluded class and as long as you get a determination letter your covered.

[Guest gpr]

When a company that provides temporary help hires employees to work at client sites, they do not usually actually terminate the employees just because a client no longer needs their services. Rather, they continue to be employed with that company, but they receive no hours (or pay) unless they provide additional services to other clients of the company. This could be viewed as very different from hiring someone for a one-time project, at the end of which they are terminated. I have spoken with a handful of temporary service providers, and all of the ones I spoke with covered their "temporary" employees as long as they had at least 1000 hours in the prior year. None of them felt that they could successfully defend excluding them by class, and had been advised by their legal counsel not to even try. Also, competitors were offering inclusion in their plans, so they felt a need to offer it in theirs as well in order to attract the better employees anyway.