Eligibility Question

[Doghouse]

I have been given a plan to administer that excludes everyone except:

a) the shareholder

b) the shareholder's spouse

c) the business manager

d) any employee hired before 1/1/2010

I am okay with a) through c) - the plan is part of a combo arrangement and that testing will pass. I have some concerns about d) though. I have a bad feeling that it may be looked at as a circumvention of the statutory age and service requirements. In other words, I'm not sure that it's a valid business classification. It could be I'm too conservative. It wouldn't be the first time. Any opinions?

Dog

[AndyH]

Here is one opinion.

1. Having an invalid business classification would not necessarily be a problem - you would just have to pass the ratio percentage test for coverage but if it is a combo you may be passing that anyways by aggregating plans. But the standard is objective business classification for the NCT part of the ABPT, and I don't see that as an issue.

2. The hire date creates a possible 410(a) issue but the way it is written does not require longer service than the statutory maximum, so I don't see that as an issue.

3. Could this provision be hiding an age discrimination issue? That would seem to be facts and circumstances, and I'm not a lawyer so I'll merely raise the question.

[david rigby]

(a)(26)?

[Doghouse]

(a)(26) passes, so not a concern.

The 1/1/10 thing is not a concern for 2011, but it's hard-wired into the plan so it will continue to apply 2012, 2013 etc. at which point the 410(a) concern arises.

Age discrimination isn't the objective. Basically they want to let one newer employee come into the DB plan next year. He has the same job description as some other people who were hired prior to 1/1/10, so this will bring the new guy in and keep the old guys out. They're not the old guys in terms of age though, just in terms of seniority.

[AndyH]

Then it should pass the ratio percentage test for coverage, IMO, since it does sound like picking and choosing people by other than objective business reasons, or so it could be argued. The numbers part is covered by the general test.

[Doghouse]

Thanks Andy. I was more concerned about this (Pension Answer Book paraphrase) -

Plan provisions may be treated as imposing age and service requirements even though the provisions do not specifically refer to age or service. Plan provisions that have the effect of requiring an age or service requirement with the employer will be treated as if they impose an age or service requirement.

I guess I still have the same concern about this kind of language, and would rather not see it. I'll express my opinion and move on.

Thanks again!

Dog

[ak2ary]

This is not an uncommon plan provision, but it has the potential for trouble. An employer switching from a DB based program to a dc based program will often say that anyboby hired before x/xx/xx stays in the db plan and anyone hired later goes in a new DC.

Yours is different in that it sounds like the date chosen was done to pick a group big enough to pass coverage but not too big. In that case , wthout any valid business reason for the choice of 1/1/10, the IRS may well determine that the "Hired before 1/1/10" eligibility condition is, in fact, an impermissible service requirement

edited for many typos