$0.00 compensation for participant with service

[12AX7]

Can someone point me in the direction of where I may find commentary regarding a participant (HCE) that has service, but no compensation in 2011.

I feel as though I should not include that participant in the ADP/ACP test, but I can't remember where I read or heard that.

Thanks !

[ETA Consulting LLC]

In order to calculate the individual deferral percentage, you must divide the deferral by compensation. Mathematically, anything divided by zero is undefined. If included, what percentage would you include him at?

Good Luck!

[Lou S.]

Sorry I can't point you to a specific cite but at several conferences over the years the IRS has addressed this informally from the podium and said not to include the $0.00 comp partner in the ADP/ACP test. I think the logic if I recall correctly was that since they had no comp, they had no effective ability to defer and should not be included with a 0% rate.

[12AX7]

Lou, I agree with you and was looking something that said it. It makes sense on every level to me. To perhaps take this example one step further. Would you exclude the same person if you were general testing nonelective contributions?

[Tom Poje]

at the 2000 ASPPA Conference the question was:

26. A Company with an October 31 plan and fiscal year-end elects S status and switches its fiscal year and plan year to a calendar year basis. This results in a 2-month fiscal year and plan year. The owner of the Company (who is one of 2 HCEs) receives no compensation during this 2-month year (assume for example that he is paid on the first day of each calendar quarter). Is the owner an “eligible employee” such that he’s a zero in ADP testing? It has been argued that he is an eligible employee because he worked and was only limited from making deferrals by §415 (and the last sentence of 1.401(k)-1(g)(4)(i) says that an employee doesn’t fail to be treated as an eligible employee if he may reason no additional annual additions due to 415). Conversely it has been argued that such employee is not an eligible employee because he could not defer since he had no compensation.

This will be discussed from the podium.

(Supposedly the answer was it would be reasonable to treat the person as ineligible.

at the 2008 ASPPA Conference Q and A 1

A 401(k) plan disregards commissions as compensation for plan purposes. One employee has only commissions, therefore could not defer. Assuming the compensation definition satisfies 414(s) testing, is this person included in the ADP test as a 0%, or would they be excluded from the test completely since they have no compensation for plan purposes?

If the person is excludable, does the answer change if, for purposes of testing, the plan included all compensation (including the commissions) for ADP testing purposes?

IRS Response Refer to Treas. Reg. §1.401(k)-2(a)(3)(i), last sentence, which requires that you include all eligible employees in the testing. What is an eligible employee? Per Treas. Reg. §1.401(k)-6, it is someone who is directly or indirectly eligible to make a deferral for the year. Is this guy eligible? Yes, you must include him as 0%

ASPPA Counter response: Request was made for further discussion on the issue. Some at ASPPA feel an ee with no comp should not be in the test at all, rather than as a 0.

..............

lets say the hardship rules didn't change, and for the sake of the argument the person could not defer for a full plan year. The regs are clear you would include that person even though they could not defer. same if the person hits the 415 limit (don't even want to know how that is possible) so saying a person doesn't have an effective way to defer could be tredding on thin ice.

I guess one question would be Does it make a difference?

as an interesting side note: suppose the plan has immediate eligibility to defer. Person is hired in late December, so he enters the plan, lets say 12/28/2011.

now, do you include him in the test at 0 in 2011? (Since I view things as 'paychecks with a plan year, I would not)

[Guest AdvancedPlanDesigns]

I have a plan where the 100% owner is no longer taking compensation. He didn't in 2010, and didn't again in 2011. His wife and son still work at the company. So if I go ahead and terminate him(per the company's instruction, he's old enough to retire) then is there any ownership left in the plan? I know through attribution if the owner was still an employee then the son and wife would have attribution but what if the owner is no longer an employee? Are the son and wife still HCEs?

Thanks!