Employment on last day requirement-what if the business closes in the winter?

[Guest Enda80]

Hypothetical situation; a business has a calendar plan year, and a last day requirement. However, in fact, the business closes during the winter (or the spring-the whims of tourists can work both way). Has the taxpayer/plan sponsor gamed the system?

[WDIK]

Does the hypothetical situation take into account the non-hypothetical coverage requirements?

[J Simmons]

Hypothetical situation; a business has a calendar plan year, and a last day requirement. However, in fact, the business closes during the winter (or the spring-the whims of tourists can work both way). Has the taxpayer/plan sponsor gamed the system?

It's a bit like Kafka, isn't it? 'Everyone must be at their desks, ready to work by 8:30 AM; doors will open at 9:00 AM sharp. No exceptions.'

[Guest Enda80]

Hypothetical situation; a business has a calendar plan year, and a last day requirement. However, in fact, the business closes during the winter (or the spring-the whims of tourists can work both way). Has the taxpayer/plan sponsor gamed the system?

It's a bit like Kafka, isn't it? 'Everyone must be at their desks, ready to work by 8:30 AM; doors will open at 9:00 AM sharp. No exceptions.'

Well, in that case, that could represent a customer service support center dealing with offices and stores in other timezones. Or, doors for customer would open at 9:00 AM.

[Guest Sieve]

There are/were rules for seasonal industries' employee eligibility/vesting/hours or some such thing, that I've never focused on. Old DOL IBs, I think (although I believe they were repealed. Is any of this guidance current--and does any of it help at all? Winter closings would be common with many northern businesses, like Dairy Queen, golf courses, lawn services (that don't plow snow), etc., so I woudl suspect there's some guidance somewhere on this issue.

If absolutely no one is employed at year-end, including management emoployees (who often stay on in the off-season), then what's the harm of such a plan design. It's a plan with no current participants, no current coverage issues (because no one benefits), no current contributions. Perhaps it is used for rollovers only--and isn't that ok?

[J Simmons]

Larry, last I looked that DoL guidance on seasonals had (as you noted) been repealed and not replaced. I've actually been looking for further guidance to be issued since I last looked, and am not aware of any.

Suppose that the owner is yet employed and receiving a paycheck on the last day of the plan year, when the business is otherwise closed and no one else is on payroll. A company contribution is made, and he is the only plan-eligible employee and thus receives allocation of all of it into his plan account. How do you see the coverage issue in that situation?

[Guest Sieve]

I think normal coverage rules would apply.

[J Simmons]

With no NHCEs because none have become eligible because they do not have the 1 eligibity year of service, though some have been re-hired to work consecutive seasons?

[Guest Sieve]

By that I mean normal coverage/eligibility/accrual/discrimination rules, including answers to such questions as:

• Is there a problem if all NHCEs are only part-timers and can never reach eligibility?
  
• Should eligibility/accrual hours be reduced pro rata down from 1,000 h/s based on the number of months the business is open for NHCE employees?
  
• Is this a design specifically intended to prevent accruals, vesting, etc. among NHCEs?
  
• And, most importantly, the very technical determination of whether it quacks like a duck.
  

And, I'm sure there are other smell tests it would need to pass (that I can't even imagine at this hour of the evening . . .)

[J Simmons]

By that I mean normal coverage/eligibility/accrual/discrimination rules, including answers to such questions as:

• Is there a problem if all NHCEs are only part-timers and can never reach eligibility?
  

Sieve, is there a problem?

• Should eligibility/accrual hours be reduced pro rata down from 1,000 h/s based on the number of months the business is open for NHCE employees?
  

Sieve, should those hours thresholds be reduced?

• Is this a design specifically intended to prevent accruals, vesting, etc. among NHCEs?
  

Sieve, aren't all year end employment requirements and hour threshold requirements designed and intended to exclude and prevent accruals and vesting--and typically impacting NHCEs disproportionately?

Since the DoL has repealed its attempt to do some of these notions (and not yet replaced the repealed regs), what compunction is there for an ER to observe them?

[rcline46]

If the NHCEs ever became eligible, then testing is on a 500 hour rule, and the plan would most likely fail. So, in seasonal industries, it is easy to work 1000 hours and become eligible, and normal testing would fail if those who became eligible ever worked over 500 hours.

[J Simmons]

But if no NHCE ever hits 1,000 hours in any season and becomes eligible (as posited in post #8), then what's the coverage problem? Does the 1,000 hours for eligibility year of service have to be relaxed to let at least some NHCEs into the plan?

[Kevin C]

Hypothetical situation; a business has a calendar plan year, and a last day requirement. However, in fact, the business closes during the winter (or the spring-the whims of tourists can work both way). Has the taxpayer/plan sponsor gamed the system?

The last day requirement is that participants be employed on the last day of the plan year, not that they work on the last day of the plan year. If the business temporarily shuts down over a period that includes 12/31, that doesn't mean no one is employed on 12/31. It's the same situation as a company open Monday - Friday when 12/31 falls on a weekend.

There was a fairly confusing ASPPA IRS Q&A question about this at one of the mid-year conferences a few years ago. The bottom line of the answer was that it is whether the employment relationship exists on 12/31 that matters, not whether the company is open for business on 12/31.

[rcline46]

In these situations you NEVER want to relax requirements, and you want the longest wait you can get, give up the 100% vesting for a 2 year wait.

[Guest Sieve]

Kevin -- You're right about not having to literally work on the last day of the year vs. being employed on the last day. Most of these seasonal employers, however, will close for long periods of time (5 or 6 months), and no one (except, perhaps, some management types) is considered employed during the closure--all others are usually terminated, and not carried on payroll for any reason, and then are rehired the next year. So, even if someone reaches 1,000 h/s and eventually becomes a participant, that individual may not ever receive an allocation due to the last day allocation rule.

John -- I don't know the answer to my posed questions in this type of situation--except the quack like a duck issue. But I admit that I have no idea how to resolve it and have no practical esxperience with seasonal industries. The repeal of the DOL rules gives me no clue regarding how the IRS views this, or how the DOL approaches it on a practical level. But, based on the posts on this thread, it appears that a seasonal industry's plan will be treated like any other as to eligibility, accruals, etc.--in which case, I guess it doesn't quack like a duck like I thought it did.