401(k)(3)(F) Issue of Excluding NHCEs from ADP/ACP Test

[Guest Edward McElroy]

A 401(k) Plan currently provides that employees will be eligible to participate on the January 1 following their date of hire. An amployee hired on February of 1998 would complete a year of service in February of 1999. Due to the 18 month rule, the employee would have to participate in the plan sometime during 1999. Is company able to exclude employee from test (not plan) for 1999? A consulting firm told me that its position is that anyone hired before 7/1/98 could not be excluded from ADP test under 401(k)(3)(F). Any thoughts? Thanks. Ed

[MWeddell]

I believe it's a reasonable interpretation of the law and regulations under both pre-1999 and post -1998 law, but it's certainly not clear.

Two arguments why you couldn't exclude all those hired after 7/1/1998 and those born after 7/1/1978:

(1) Code Section 410(B)(4)© refers to when the plan allows an individual to participate. Hence, if the plan doesn't have semi-annual entry dates, you've got to question it. However, regulations are more generous and seem to refer to the maximum period allowed by law. ("the greatest minimum age and service conditions permitted under section 410(a)", Reg §§ 1.410(B)-7©(3), 1.410(B)-6(B)(4)(Ex. 4), 1.401(k)-1(B)(3)(ii), 1.401(m)-1(B)(3)(ii).)

(2) For plan years beginning in 1999 or later, Code Section 401(k)(3)(F) applies. It cross references Code Section 410(a)(1)(A), which doesn't include the entry date provision. However, one can interpret Code Section 410(a)(4) as modifying Code Section 410(a)(1)(A) prior to its incorporation into 401(k)(3)(F).

In short, I say that it's an aggressive interpretation but reasonable.

[This message has been edited by MWeddell (edited 05-11-99).]