Waiving Eligiblity

[austin3515]

Plan uses statutory 1 YOS/age 21 eligiblity.

Scenario 1:

Owner and owner's immediate family are the only employees. Owner's Kid is hired on January 1, 2010, and owner wants him in the Plan from Day 1. No other employees have been hired since that date and there are no immediate plans to hire anyone else. Would an amendment that waives eligiblity for anyone hired as of 1/1/2010 be allowed? My assumption is yes, since there are no other NHCE's, and therefore there is no issue of discrimination. If the answer is "no, this isn't allowed" then it would seem that this type of Plan would be precluded from making several kinds of amendments, which would seem wholely inappropriate...

Scenario 2:

Same as Scenario 1, except that there are three employees who have been working there for 5 years who were made to satisfy statutory eligiblity. My feeling is that this WOULD be discriminatory because there are NHCE's in the Plan, and as such the amendment is subject to discrimination testing.

Scenario 3:

Same as scenario 2, except that eligbility is amendmed to be immediate. The employer has very very low turnover and is not growing, and it is not anticipated that any new employees will be hired any time soon.

[Guest Sieve]

This is plan amendment testing, I think (1.401(a)(4)-5)), and it's too late to sort through the regs (easy way out), but I think the answers turn on how long you keep the change in place. In the event some NHCEs are hired later, you can't change eligibility back if the result is that the accelerated eligibility only applies to an HCE.

However, in site of the fact that the reg also applies to the establishment of a plan, I've never heard of eligibility being treated as discriminatory when immeidate eligibility is permitted for current employees (all HCES in a start-up), with new hires subject to a 1 y/s standard, have you?

[Bird]

I would be most comfortable with scenario 3. I think if you went with scenario 1 and then an NHCE was hired later, it could be argued that there was discrimination in favor of an HCE (although not at the same time of course). I agree that scenario 2 is discriminatory, at least in my eyes, but honestly I don't know how they measure it objectively.

However, in site of the fact that the reg also applies to the establishment of a plan, I've never heard of eligibility being treated as discriminatory when immeidate eligibility is permitted for current employees (all HCES in a start-up), with new hires subject to a 1 y/s standard, have you?

I've never seen it challenged but have avoided it myself, due to the language you mention about the establishment of a plan being an amendment for this purpose. I thought I remembered hearing an IRS speaker say it is problematic, but that's a very hazy memory. None of the examples even come close to this point, so maybe it's not really discriminatory.

[austin3515]

For some reason your start-up example sounds even less aggressive than my scenario 1, since you can point to the fact that this was a new plan, and to not waive eligiblity would render the plan with no participants, which would be ridiculous.

I agree with Bird that scenario 3 does work the best if thre are other NHCE's...

[Bird]

For some reason your start-up example sounds even less aggressive than my scenario 1, since you can point to the fact that this was a new plan, and to not waive eligiblity would render the plan with no participants, which would be ridiculous.

Yeah, but nobody's forcing them to adopt a plan at that point, and there are alternatives - wait a year until you have eligibility under a one year waiting period, or go with a shorter waiting period, that is "permanent." At an aggressive extreme, you could have partners who say they started a business on January 1, and didn't hire employees until January 10. Waiving eligibility for anyone employed on Jan 1 and requiring a year of service for everyone else sure looks discriminatory in my eyes.

[austin3515]

Well sure, that sounds discriminatory... But I was assuming the owners need to work for a little while (months??) before having enough business to hire employees...