Otherwise Excludable Employees

[Alex Daisy]

Can someone explain to me Otherwise Excludable Employees in the ADP test?

I have a Plan where the Eligilibilty Requirment is Age 21 and 1 year of Service, with Quarterly Entry Dates.

For example, an employee was hired on 7/1/2007, and they worked 1,000 hours from hire date to anniversary date.

For the 2008 ADP test, can I exclude them due the the Otherwise Excludable Employee rule and why?

Thank you

[Jim Chad]

Most documents would say that employee enters 7-1-08. People who hire 7-1 or 7-2 can be a nightmare.

Lets say ee hired 7-5-07, your plan brings them in 10-1-08. But the plan could legally exclude them until 1-1-09. So they can be separated for testing. Is he an HCE or NHCE?

[BG5150]

When does the document say they come into the plan? Does it say something like "coincident with or the next..."? If so, I would think that this person enters 7/1/08 and is not excludable.

Actually, With a hire date of 7/1, the person would satisfy one year on 6/30, so the next entry date is 7/1.

If you are using Relius, depending on the setting, I believe, the program will exclude those who have worked less than 18 months for some reason.

[Tom Poje]

the otherwise excludable has been discussed over and over and there are still no 100% clear guidelines.

the Code simply says a body must enter the first day of the plan year or 6 months after meeting the requirements.

This imples a plan could have, for all practicallity 183 entry dates - e.g. 1/1, 7/1,7/2,7/3.....12/31.

so lets say you have someone hired 3/1/07. one year later is 3/1/08. 6 months after that is 9/1/08. arguable, under the terms of the Code, if this person quit anytime between 3/1/08 and 9/1/08 the plan could have excluded him, and therefore he could be treated as otherwise excludable. (Thus Relius will otherwise exclude people under an 18 month rule)

some IRS agents agree with this position, others say if the plan specifies entry dates, you have to consider the entry dates as well. They keep promising we will get guidance someday.

years ago I read somewhere that the person who wrote that particular section of the Code had intended it should have read 'the first day of the plan year or 6 months after the first day of the plan year (or something to that effect) but it didn't come off that way. probably because what is exactly 6 months after 1/1....6/30? 7/2? other???

[Alex Daisy]

Most documents would say that employee enters 7-1-08. People who hire 7-1 or 7-2 can be a nightmare.

Lets say ee hired 7-5-07, your plan brings them in 10-1-08. But the plan could legally exclude them until 1-1-09. So they can be separated for testing. Is he an HCE or NHCE?

The employee in question is a HNCE.

I was reading an article from McKay Hochman that says I must include the HNCE even if the statutory entry date has not yet been reached. (see below). I think this is contrary to the Otheriwse Excludable concept.

In the situation where an NHCE participant is making elective deferrals after meeting a less than one year eligibility requirement and then satisfies the statutory age and 1 year of service requirement before the plan year end, they are included in the ADP or ACP test even if the NHCE’s statutory entry date has not yet been reached. The following examples will illustrate this point:

Example 1

A plan has immediate eligibility for deferral and match. An NHCE is hired on November 1, 2009 and begins making elective deferrals and is matched as of hire date. That NHCE is not in the 2009 calendar year tests because they are in the “otherwise excludable” group. However, because they have satisfied the one year and age 21 requirements by the end of the 2010 plan year, they are in the 2010 ADP and ACP tests. This is true even though the statutory entry date would not have been met until January 1, 2011.

[Jim Chad]

It looks like they are playing it safe. As Tom says there is no clear guidance.

FWIW I would exclude for 18 months.

[Below Ground]

I second that. As I understand this topic it is the earlier of the PYB following the date satisfied, or date satisfied + 6 months. By date satisfied I mean 1 year or 21.

[Alex Daisy]

It looks like they are playing it safe. As Tom says there is no clear guidance.

FWIW I would exclude for 18 months.

Can you Pick and Chose which Otherwise Excludable Employees to exclude and which to excluded?

For example, exclude only the Otheriwse Excludable Employees who did not defer, and include the ones who did defer?

[Bill Presson]

It looks like they are playing it safe. As Tom says there is no clear guidance.

FWIW I would exclude for 18 months.

Can you Pick and Chose which Otherwise Excludable Employees to exclude and which to excluded?

For example, exclude only the Otheriwse Excludable Employees who did not defer, and include the ones who did defer?

The easist way to make that determination (I've found) is to ask yourself:

If I do "X" will it help me/my client? If the answer is "yes" then it's not allowed.

[Jim Chad]

Bill!

So cynical!

So Pessimistic!

I use the same question.

[imchipbrown]

Ok. I have a calendar year plan that allows deferrals after 3 months, entry on the first day of the quarters. I have a troublesome ADP, so I usually (for my client's HCE's benefit) exclude from ADP testing based on the thought pattern "we COULD have one year of service and semi-annual entry" and use this as the exclusion point (based on hire dates). So, about an 18 month period based on a 7/1 entry.

This year, I have a census where I'd like to exclude employees after a certain date which is somewhat within the "1 year and semi-annual cutoff" date. Example, calendar year 2013 testing, I want to include employees hired up until 10/1/12 ( a 15 month period). Obviously, there's a NHCE deferring a ton that was hired after 6/30/12 but before 10/1/12.

So I guess I can draw this arbitrary line?

[Belgarath]

I'm not so sure about the arbitrary choice. Seems like an aggressive interpretation - personally, I'd lean toward having to include all of the otherwise excludables in the separate testing plan, rather than just some of them.

[Kevin C]

I don't see any wiggle room for setting an arbitrary length of service. The way I read the regs, you have to use age 21 and a year of service in the determination of otherwise excludables. The only thing I see some flexibility on is the entry date used in the otherwise excludable determination. Since the regs don't specifically reference entry dates, some feel the plan's entry dates should be used. Others feel the statutory semi-annual entry dates are implied and should be used. The EOB says both approaches should be considered reasonable in the absence of clear regulations.

[imchipbrown]

There seems to be enough gray. I'm including a few "otherwise excludables". They're not mandatorily excluded. Maybe under a theory like permissive aggregation. Again, theoretical, not "as it is written in the document" (1). And for testing purposes, not to decide who to actually let in or exclude from participation.

My perception is that the "otherwise excludable" provision is there to encourage liberal eligibility requirements without punishing the HCEs.

I don't propose to pick and choose participants. I'm classifying based on hire dates. My actual testing cutoff can be one of the four actual entry dates of the written plan.

Rhetorical question: Why do I have to assume something is prohibited unless it's specifically allowed? I think I'd rather ask forgiveness than permission here.

(1) Plan document says "Excludable Nonhighly Compensated Employees. The Company may also, pursuant to applicable Treasury Regulations, exclude all Participants who have not met the minimum age and service requirements of Code section 410(a)(1)(A) before the first day of the seventh month of the Plan Year from consideration in determining whether the requirements of (document Section 5.02) are met."

[BG5150]

Note, it says "exclude ALL Participants." (my emphasis)

[imchipbrown]

Also, it says "MAY" (not to be contrary)

[Belgarath]

We'll agree to disagree, but I think you are misinterpreting the document language. I agree it says you "may" - but the "may" allows you to exclude "all" - NOT "all or some" - so you have discretion to exclude all, or none.

Anyway, that's just my take on it - and free advice is worth what you pay for it. And mine is probably worth even less!!

TGIF

[Tom Poje]

in the same "related match of excess contributions for a failed ADP test may be forfeited"

guess that means you don't have to if you don't want to.

rather it means, even those these contributions (at least for most HCEs) are already 100% vested, and even though you normally don't forfeit 100% vested $, in this case, you may do it.

[imchipbrown]

OK, first, I apologize for the "may" crack, if it offended.

I'm looking back over the thread and agree with Tom's 10 March 09 post (and Bill's 12 March 09 post)

I find it hard to believe there are only two testing scenarios: the Plan's "3 months, next entry date" census, or the Code's "12 months, 1/1 or 7/1 entry date" census. I think anything in between if fair game. Not naming names or choosing employees, but picking a cutoff (alternative entry) date. (I think the Code's provision is to prescribe a maximum, not a one-and-only).

I think if I could legally design a Plan's eligibility to match the testing method I want to use to test, I should be able use that method. I would exclude "all" hired after the cut-off date I pick. I would include all otherwise excludable participants hired before the cut-off date.

[pookah]

OK, I have another permutation. This is in regard to imputed service. Plan allows for 1 year, age 21 with dual entry dates 1/1 and 7/1.

Sponsor, in February, acquires a related business with 100+ employees in an assets purchase. Plan is amended to credit service for vesting and eligibility with acquired company.

For this year's ADP testing may we test the group of acquired employees (with appropriate service) separately as otherwise excludible or must we test them all together or, alternatively, do we have a choice? To me, the regs seems ambiguous.

Thank you.