Change to an Excluded Class

[Guest andmik]

Hello:

This one seems to has me going in circles.

Participant is a FT Employee and has worked and been eligible for the 401(k) plan for 4 years. Participant decides they want to change to PT status. Plan excludes PT Employees until or unless they work 1000 hours during an eligibility computation period.

The answer would be easy if they were moving into a different type of excluded class (i.e. union emloyees, nurses, etc), but this PT status has me struggling. Given the IRS's sensitivity to this PT/Temp class exclusion, I am not sure how this should be applied.

If they change today into PT status, but have worked 1000 hours already in 2010, would they really ever be PT, or does the "hours clock" start over from the day they enter the PT excluded class?

Obviously the risk is if they exclude them, and they should not have and a good amount of time passes before discovery, they will owe QNECs to correct, whereas if they include them and it is determined they "guessed" wrong, the correction would be to get the money out of the plan. Just not sure

Thanks in advance for any insight into this application.

Andmik

[401king]

If they're already a participant (even though they're not contributing) then they will be a participant as long as they are employed with the sponsor. Just because they have not contributed does not necessarily mean they have not been a participant all along.

[Guest Dean2010]

Where can I find employee exclusion rules? I am one of 3 employees included in a 412i plan, however, the remaining 9 were excluded and supposedly part of a 401k plan (although they have not received confirmation of this).

[Mike Preston]

I suspect that the best and most accurate answer to your question will leave you with more questions than you had before you posted. Suffice it to say that the rules on who can be excluded, and when they can be excluded, are the subject of many hours of continuing education for those who deal with this stuff on a daily basis.

But, to answer your question, the rules are contained in the Internal Revenue Code (assuming your employer is not a governmental agency or religious organization) under sections 410(b) and 401(a)(26).

Each 412(i) plan has to satisfy both of those sections.

And while the rules are labyrinthian, somebody familiar with them should be able to explain, in a few words, how a plan satisfies both definitions.

However, the real question is what would you do with the answer? Even if you could substantiate a claim that the plan in question failed one of the requirements, the plan sponsor would not be required by law to fix the failure. Fixing the failure is completely optional. There are tax considerations and cost considerations that go into the decision.

Hope this helps a bit.