Can maximum statutory entry date rules be applied in running ADP test,

[Guest MEGary]

I am looking at the ADP test for a plan that has a 1 year wait, no age requirement and monthly entry dates. It has 3 employees (over age 21) that were hired 11/5/97 and were elgible to enter the plan 12/1/98. In the ADP/ACP testing, statutory exclusions were applied and these three individuals were excluded from the ADP test. Since these participants were all over 21, I didn't think they could be excluded because the plan had a 1 year wait (statutory exclusions apply to plans with less than a 1 year wait).

However, on one of Tom Poje's messages regarding statutory exclusions he wrote "The law requires employees to enter after age 21 and 1 year of service. (Actually you have to enter 6 months after meeting the requirements)".

So does this mean that these individuals can be excluded from the ADP test, because under Tom's explanation, they wouldn't enter the plan until some time in 1999 (6 months after meeting the requirements)?

[Guest GregSelf]

Well, I thought I was sure about this until you asked your question. Take a look at Code Sect. 410(a)(4) and Rev. Rul. 80-360 for an illustration. In short...I agree with Tom. I think you can assume two entry dates as part of your exclusion - and thus, wait until the next statutory entry date (first day of plan year or date six months after satisfying requirements) to allow the person(s) to enter.

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[MWeddell]

It's a real muddle, but I think the answer is yes, you can get to the result you want.

Prior to 1999, the way to accomplish this was to disaggregate the plan into two component plans, one component plan that covered employees that could have been excluded from coverage using the maximum age and service conditions permitted by Code Section 410(a) and the other component plan covering the rest of the employees. One could use an entry date assumption when defining which employees are otherwise excludable under 410(a). Technically, both component plans have to be tested, but because beginning in 1997 the HCE definition depends on prior year compensation (with the rare exception of a newly hired 5% owner or a family member considered a 5% owner through the stock attribution rules), it was easy to judiciously choose an entry date assumption that would cause no HCEs to be in the otherwise excludable component plan.

Beginning in 1999, Code Section 401(k)(3)(F) becomes effective. It's not very clear whether you can use the entry date assumption when you exclude those < 21 years or < 1 year of service. Key IRS officials believe that one can't use the entry date assumption under Code Section 401(k)(3)(F). See Q&A 76 from the IRS questions from the Oct. 1999 ASPA conference [with thanks to Dave Baker for posting it on the what's new section of BenefitsLink].

However, what's left unsaid in the IRS Q&A is that one seemingly can still use the disaggregation rules that are still in the regulations instead instead of the new statutory rule that "the employer may" use. As explained earlier, the regulatory disaggregation rules probably still get you where you want to go because there's rarely any HCEs in the otherwise excludable component plan.

Well, that's about as clear as I can explain it. Hey, I said it was a muddle!

[This message has been edited by MWeddell (edited 11-18-1999).]

[Earl]

Seems to me that the statutory exclusions relate to age and service, not entry.

Plan provision:

1. Age: 20 - you can pretend this is 21

2. Min svc: 1 month - you can pretend this is 12.

3. entry date: whatever - I don't think you can chnge.

Desn't it say otherwise excluable due to min age and service?

[Guest]

as I said before, I think the entry date issue is a gray area, there seems to be 3 schools of thought.

1. you are stuck with whatever entry dates your plan has.

2. use two entry dates, first day of plan year and first day 6 months later

3. first day of plan year and 6 months after meeting requirements. (many entry dates)

again, this is what the regs say:

1.410(B)-7©(3) ...an er applies section 410(B) separately...one benefitting ees who have satisfied the lower min age and svc condition under the plan but not the greatest min age and svc under 401(a) and one benefitting ees who satisfied the greatest minimum age and svc conditions permitted under 401(a)

thus, there is no argument about the issue involvoing age and service. But what does 401(a) say?

401(a)-(1)(A)(i) the date employee attains age 21 or

(ii) the date he completes one year of service

note:these are the maximum conditions - no entry date(s) specified.

however 401(a)(4) adds

Time of participation:

first day of the plan year beginning after the employee has satisfied these requirements, or

the date 6 months after he has satisfied such requirements.

Thus, in addition to age and service (for maximum exclusion) there appears to be a clearly defined maximum 'date of participation' -

for what it is worth.

one should take the approach he/she feels most comfortable with - conservative or otherwise.

[Earl]

excelent summary. Thanks

Personally, I still think age and serv, yes.

entry, no