Eligible to Non Eligible Class

[Lori H]

Would someone give me an example of how a participant goes from an eligible to non eligible class? I have a participant in a Safe Harbor 401(k) who went part-time (approx. 400 hrs a year) and need to know if she is still eligible to particpate in the plan. Thanks,

[ETA Consulting LLC]

Sure, she is. First, the IRS doesn't allow "service class" exclusions; where the class being excluded is defined by a customary work schedule (i.e. part-time is anyone working less than 'x' hours per week). Secondly, there are not accrual requirements for deferrals or safe harbor (i.e. 'x' number of hours per year or last day).

Nothing should change for a mere reduction in hours.

Good Luck!

[Tom Poje]

maybe, maybe not. it depends on what you are really asking.

she has probably incurred a break in service, and the ERSIA Outline Book points out that you don't have to quit to have a break in svc. see 2 B2c of the book.

(I had nevvver thought about that before until I read that section years ago) but also check document wording.

all that being said, it is probably a moot point, because if its a 401k plan, you are probably under the rule of parity, and for someone who is active the break in svc rule never really kicks in, so to speak.

if plan is top heavy she would be eligibile for top heavy.

if the plan is safe harbor then she has to get the safe harbor because you can't have an hours requirement.

but as was pointed out a plan can't have a classification of 'part time'

as for an example of going from eligible to non-eligible, suppose the person went from non-union to union.

or the plan excludes dinglebats, and mid year the person became a dinglebat. those would be examples of going from eligbile to non eligible. but simply a reduction in hours has no effect.

[ESOP Guy]

as for an example of going from eligible to non-eligible, suppose the person went from non-union to union.

or the plan excludes dinglebats, and mid year the person became a dinglebat. those would be examples of going from eligbile to non eligible. but simply a reduction in hours has no effect.

So how many dinglebat exclusions have you worked with over the years?

[MarZDoates]

Is it correct that the dinglebat is not included in the adp/acp but IS included in coverage? Serious question.....funny example!! (Assuming a non-safe harbor 401(k) plan, of course.)

[ETA Consulting LLC]

This is correct. Whether a person is considered "eligible" for deferrals (adp) or match (acp) will depend on that person's class (and whether he is a member of an excluded class; for example hourly). However, coverage under 410(b) is tested against safe harbor excludable classes (i.e. union). So, if the individual is excluded (say for being hourly), he would still be included in 410(b) because hourly is not a safe harbor exclusion like union or non-resident alien.

Good Luck!

[MarZDoates]

Thank you.

[ESOP Guy]

This is correct. Whether a person is considered "eligible" for deferrals (adp) or match (acp) will depend on that person's class (and whether he is a member of an excluded class; for example hourly). However, coverage under 410(b) is tested against safe harbor excludable classes (i.e. union). So, if the individual is excluded (say for being hourly), he would still be included in 410(b) because hourly is not a safe harbor exclusion like union or non-resident alien.

Good Luck!

It has been a few years but I beleive that one of the ways I used to check myself when I did 401(k) testing was this:

In order to be on an ADP test you had be able to defer or actually defer. For the 401(k) source anyone who could defer or did defer benefited under the plan for 410(b) testing. So anyone on the ADP test was someone who benefited under the 401(k) source for 410(b). So if the 410(b) test is the ratio of:

Benefited/total testable population

Then the numberator of the 410(b) test should = the number of people on the ADP test.

As I started to review other's work I was always shocked at how big of a gap that I would find at times and upon additonal review it seems like I always found an error in the other person's work.

Maybe I just explained the obvious to people who read this board but like I said this was one of those things I used to find my mistakes and other's mistakes when I reviewed other people's work.

And if someone wants to tell my I am all wrong I could live with that reality also.

[ETA Consulting LLC]

You make an interesting point. I, too, have always reconciled the numerator in the 410(b) test to the number of employees in the ADP test. Did the same thing for ACP.

Good Luck!

[Belgarath]

Over time, I've developed a terror of making definitive statements in this business, 'cause it always seems that there's at least one situation that is an exception.

Off the top of my head, how would your method work if you are using the prior year testing method? Say a NHC terminates employment in 2013, you ARE counting him for 2014 for ADP testing, yet for coverage, he's not counted for 2014, right?

There may be other situations, but that's just one that sprang to mind quickly. Or maybe I'm nuts and am misunderstanding something completely, including what you are saying - it has been a very long week...

[ESOP Guy]

Over time, I've developed a terror of making definitive statements in this business, 'cause it always seems that there's at least one situation that is an exception.

Except that statement, correct?

I think it still works just a little more complex. The prior year method is you take the prior NHCE average and use it to measure the current HCE average. How do you know you have the right prior number? You ran the ADP test in the prior year. In that prior year you had to know the HCE average for that year's test. So in that year I compared ADP test to the covearage test.

Yes, such person isn't on the next year's 410(b).

But even in the prior year method you still run the test the same way as the current year method. You merely split the averages to different years.

So I will grant you have a minor point but I think I stand by my idea that to get good averages for any given year that is a valid check. When you use those averages is another question.

And yes it seems like every rule has an exception- except this rule. (And Spock always lies for Star Trek geeks)