Newlywed HCE?

[Leopurrd]

Here's the issue:

The plan excludes HCE's. The owner decides to marry his secretary in the middle of the year. She's now an HCE since he owns more than 5% of the company.

Her deferrals before she married - excluded or included?

My personal opinion: HCE is for the entire year; she knew she was getting married and shouldn't have deferred; hence ineligible deferrals to the plan.

Thankfully this doesn't happen too often in my plans but I guess I should learn to expect the unexpected....

Thanks for your opinions!

Vicki

[12AX7]

I agree that HCE status is for the entire plan year. Somehow, I don't think marriages get planned around HCE determinations so unfortunately, the plan will have to deal with the ineligible contributions.

[ETA Consulting LLC]

I don't know about that one. Given that deferrals were made at a time where all conditions for deferring were met, I do not believe a change should retroactively disqualify those deferrals. I would treat it the same as any other excludable class member. What would you do if the plan excluded hourly employees and a participant who deferred when from salaried to hourly mid year? I believe you would stop them from deferring immediately upon the status change.

I respect that HCE determinations are made for the entire year, but that is for nondiscrimination purposes; not to retroactively revoke someone's rights to make elective deferrals.

Just my take.

Good Luck!

[Tom Poje]

the accudraft language is as follows:

The participation of a

Participant who is no longer an Eligible Employee with respect to a particular type of contribution (or

component) will be suspended and such Participant will be entitled to an allocation of that type of

contribution (and any applicable Forfeitures) for the Allocation Period only to the extent of any applicable

Hours of Service completed while an Eligible Employee for that type of contribution (or component).

so I don't see any pronlems with deferrals made before the person married. before that date they were not ineligble. but once highly, you are highly for the whole year for testing purposes.

but, now, what do you use for testing comp? I don't think you can us comp once they becaome ineligible. (e.g. if person switched from non union to union, you would only use comp through the date of the switch)

[Leopurrd]

Thanks everyone!

So basically we keep the deferrals and have to manage the testing based on the time they were HCE and NHCE. I think that won't be a huge problem.

[ETA Consulting LLC]

the accudraft language is as follows:

I don't think you can us comp once they becaome ineligible. (e.g. if person switched from non union to union, you would only use comp through the date of the switch)

C'mon Mr. Poje. You know union vs. non-union deals with a disaggregation issue that is mandatory; merely changing from an eligible class to an ineligible class (without mandatory disaggregation) wouldn't necessarily change the definition of compensation used for testing.

That's not to say that your approach would be unreasonable (or eggregious), but merely saying that using the compensation for the entire year wouldn't hurt; even though it would provide a more favorable result on the test since there would be more compensation to the new HCE.

[Tom Poje]

If plan says exclude comp while not a participant then I think you have no choice. Exclude comp from date of marriage. I guess if the document says any definition of comp that satisfies 414s I guess you can use total comp, but you have to treat all ees the same. so if you have people who enter mid year, you'd have to count total comp as well.

[david rigby]

Tom's advice is correct.

This situation should be the same as an NHCE who becomes HCE during the year due to change in ownership percentage.

[ETA Consulting LLC]

We're on the same page, that compensation for benefit purposes isn't necessarily compensation for testing purposes (depending on the terms of the document). Obviously, the individual will cease to participate upon becoming a member of an ineligible class. So, no deferrals are going to be made from compensation earned when they are no longer eligible to defer. Typically, documents allow for testing on any definition of compensation that satisfies 414(s); which was my point. The reference to union vs. non-union brought in a different set of rules (e.g. you cannot use compensation earned while a union employee in a test for non-union employees; and vice versa).

We are on the same page.

[12AX7]

I took away something good from this as well. Thanks !