Excluding Seasonal Employees from Discretionary Profit Sharing

[401 Chaos]

We have an employer with the potential for a number of seasonal / temporary employees that come and go during the year (Spring and Fall seasons). Some of these individuals will likely accrue 1,000 Hours of Service during the course of a 12 month period / Plan Year. The Plan historically has required a Year of Service to be eligible. My understanding of the eligibility rules is that these individuals likely have to be permitted to participate in the 401(k) Plan once they have 1,000 Hours of Service even though they will not be employed on the last day of the Plan Year or work continuously throughout the year.

First question, is there any way to generally exclude these sorts of seasonal employees from entering the Plan? For example, the volume submitter plan document includes one eligibility option which provides for "______ (not to exceed 12) consecutive months of employment from the Eligible Employee's employment commencement date. If the Employee does not complete the stated number of months, the Employee is subject to the 1 Year of Service requirement in f. above." My understanding is that this option still may not work to exclude the seasonal employees who come and go and come back under the Plan. That is to say, unless an employee has an extended break in service, service spanning rules could require the period(s) of absence to be counted as eligible service. Does that seem correct?

Any way we may be missing to exclude these sorts of seasonal employees from entering the Plan?

Second question, the 401(k) is deferral only so no match and thus not that much of an issue to permit the seasonal employees to make elective deferrals if they desire. Employer is thinking about adding a profit sharing contribution to the Plan now, however, and does not want to have seasonal employees receive that profit sharing contribution. Assuming that the eligibility provisions are such that the seasonal employees with 1,000 Hours of Service are in the Plan and assuming they continue to accrue 1,000 Hours in each Plan Year, can the employer impose a Last Day requirement on the profit sharing piece and effectively deny the seasonals a profit sharing contribution? Because of the seasonal periods, none of the seasonal employees would ever generally be working on the last day of the Plan Year (December 31)--although they may or may not return to seasonal employment the next spring.

[Bird]

I think you are right on all counts - not good to exclude on a classification of "seasonal"; they will enter the plan but then will not share in PS if not employed on last day of the year. We have a plan like this except the employer is very generous, and doesn't have a last day provision.

[BG5150]

From the EOB:

4.a.Part-time or seasonal employees cannot be excluded by classification. Exclusion of part-time employees or seasonal employees by category, where the term "part-time" employees is defined on the basis of a customary work schedule (e.g., less than 20 hours per week), is an impermissible service condition, because the exclusion relates solely to the employee's service. See Treas. Reg. §1.410(a)-3(e)(2), Example (3). Under the one year of service definition (see Section III, Part A, of this chapter), it is possible that a part-time or seasonal employee could be credited with enough hours of service to earn a year of service. For example, a part-time employee who normally works less than 20 hours of service per week, might end up working substantially more hours because of a special project, overtime or busy seasons. If this employee were excluded from the plan solely because of his or her classification as a part-time employee, the plan would be in violation of the minimum service requirements. EOB, 2008 ed. Chap.2, Sec IV (4)

[jpod]

Last Day rule can work, but then it might lead to a 410(b) problem or at least an unanticipated 410(b) complication depending upon the size of the 1000+-hour seasonal population in relation to the rest of the workforce.

[BG5150]

As for the deferrals: Will a lot of them be making deferrals? And at what percentage. My experience with part-time or seasonal workers is that they generally put little if any money away for retirement. This will affect the ADP test.