Allocation and testing inclusion of EE who didn't work

[Guest Dash02]

I'm performing CT calcs for a plan that does not require last day employment or any minimum hours in order to receive a non-elective P/S alloc. Plan is top heavy and does not allow 401(k).

Long-standing EE had cancer and rendered zero services in 2009. ER kept him on payroll until death in April.

Does he get an alloc.?

More importantly, is he included in my c-t testing?

Thanks.

[J Simmons]

No contribution.

Not included in testing.

[Guest Dash02]

Thanks J. Can you explain the basis for your conclusions?

[J Simmons]

Thanks J. Can you explain the basis for your conclusions?

Why certainly. IRC section 415©(1)(B) limits the DC benefit accruals to the lesser of $49,000 or 100% of considered compensation. If someone has no considered compensation, then zero is his or her considered compensation, and since that is less than $49,000, zero is the effective limit on benefit accruals for this employee.

Now, as for testing, if you included former employees who in the current year have no compensation, how far back would you go? In other threads here this year, there has been discussion that if you could manipulate who did not have any earnings but get to be included in your testing, you could dilute the HCE percentages considerably by putting the owner's family members on payroll for a time (until plan eligible) and then they'd stop working and not receive a salary after that. You could keep them on indefinitely, skewing the nondiscrimination and minimum coverage tests. Obviously, the IRS would not allow that, but by the same token then, NHCE's that are former employees with no current year income would be excluded as well.

[Guest Dash02]

Thanks John.

I'm afraid that my original post was unclear. The cancer-stricken participant was kept on the payroll and was paid $3,150 in 2009 prior to his death in April.

I suspect this changes your analysis. Sorry about the confusion. Kindly advise.

[J Simmons]

Does your plan require a certain number of hours in the current year to be eligible to accrue a benefit (1,000 or less may be imposed)?

Does your plan require year end employment to be eligible to accrue a benefit?

Does your plan have a provision where either/both such requirements do not apply to an employee who dies during the current year?

[Guest Dash02]

Just to be clear, he was paid $3,150 in 2009 even though he rendered zero services in 2009.

[Guest Dash02]

Does your plan require a certain number of hours in the current year to be eligible to accrue a benefit (1,000 or less may be imposed)? No

Does your plan require year end employment to be eligible to accrue a benefit? No

Does your plan have a provision where either/both such requirements do not apply to an employee who dies during the current year? No

Any P who is employed on last day of PY will be an Eligible P.

Any P who terminates employment before last day for any reason (e.g., retire, death, disability, any other reason) will be Eligible P regardless of hrs worked during PY.

Every Eligible P constitutes a separate Allocation Group.

[J Simmons]

I think you'd better have the situation and the entire plan documentation reviewed by a qualified pension professional. There are more follow up questions and potentials than can adequately be addressed on a message board.

[BG5150]

I always thought: no hours of service, not in the plan for that year.

[J Simmons]

For one thing, there is the possibility that the payments in 2009 were for services performed in 2008, and depending on the plan's 415 compensation amendment, it might be counted for plan purposes in 2009. It depends on that amendment in great part.

[ak2ary]

Its a judgement call based on whether an employer/employee relationship existed in 2009. If the 3150 was paid as severance pay it is clearly not 415 pay. If however, the employer /employee relationship continued, perhaps in the form of sick leave, this may well be 415 comp. AS far as hours of service, if this was not severance pay and was sick pay, it is pay for hours that were not worked. This would fit the general definition of hour of service as each hour for which you are paid or entitled to payment (regardless of whether you worked)

Frankly it sounds to me like he was still an employee and remained an employee up until his death. Maybe I am reading too much in but, had he recovered in April, did he have a job???...if so , it seems the employer/employee relationship never stopped

Of course its safest to just allocate zero to his allocation class