EE expected to work greater than 20 hrs/wk but does not

[blue]

A plan that excludes employees who customarily work less than 20 hours per week but contains language which states if hours exceed 1000 in any computation period the employee is eligible follows the participation rules under 410(a).

However, what happens if the plan has dual eligibility (immediate for deferrals and 1000 hours for employer contributions). When an employee is hired it is estimated (based on the job title) that they would work greater than 20 hours per week and are allowed to start deferrals. In the first employment computation period they actually work less than 1000 hours and continue to work less than 1000 hours in each subsequent plan year.

After the first 12 month employment computation period, when it was discovered they never worked 1000 hours, were you suppose to stop the deferrals and consider them excludable or since they were allowed into the plan do you continue to allow deferrals.

Any thoughts would be appreciated.

[Guest Sieve]

I'm not sure your PSP eligibility provision passes muster, since you could allocate to someone who never reaches 1,000 h/s in a computation period (based on expected work hours) but not to others who never reach a y/s. So, someone hired on 11/30, expected to work 20 hrs/wk, might get an allocation as of 12/31, and might continue to receive an allocation in future years because of the expectation of weekly h/s, but others who also do not earn 1,000 h/s are excluded because of their anticipated weekly service. I believe that's an impermissible discretionary provision, and it also violates 410(a). Better to exclude individuals based on job classification (assuming you can pass 410(b) muster).

For the 401(k), "immediate" means "immediate". Just as above, you can't permit some employees to defer and others not to defer based on an assumption of weekly h/s.

[Kimberly S]

If the document has immediate eligibilty for deferrals, why would you stop them based on not meeting the criteria to receive an employer contribution?

[Jim Chad]

The Corbel VS document has that language to exclude "part-timers" like so many employers want to do.

Blue, my understanding of it is you should treat it as if a person was included based on job title and the fact that they later did not work 1,000 hours is not relevant.

Steve brings up a question I haven't thought through. How are you testing for coverage on this?

Can you contact your document provider?

I would be interested to know what they say and I would like to know how testing is handled.

[blue]

My question may not have been worded very well.

True, Treas. Reg. 401(a)-3 states that the maximum service requirement a plan can impose is one year of service (in some cases two). While a plan can impose other eligibility requirements, a service condition which could require more than one year of service is invalid. Therefore, excluding part-time employees whose customary employment is for not more than 20 hours per week is an impermissible service requirement because such an employee may work more than 1000 hours in an eligibility computation period and therefore exceed the section 401(a) limits.

However, a plan may exclude part-time employees as long as the employer designs the provision in such a way the there is no possibility of indirectly imposing an hour of service requirement in excess of section 401(a) statutory maximum (i.e. if the employee actually works 1000 hours they will be brought in on a prospective basis). See IRS QAB dated 2/14/06.

The plan has dual eligibility immediate for deferrals and 1000 hours for employer. No employee would receive an employer contribution with less than a YOS as Sieve suggested.

Chad thanks for the insight. That was sort of what I was thinking regarding participants who were expected to work more than 20 hours and ended up not doing so. I always understood the 1000 hours let them in but this is the first plan where I have encountered employee who did not actually work more than 20 hours.

I do not understand how coverage testing will be an issue. Those with less than 1000 hours would be in the otherwise excludable group.

[Jim Chad]

Blue, I think you are right.

If you are thinking that there will never be an HCE in the group of people with less than 1,000 hours, I can't see how you could have a problem.