Service-Based Allocations - eligible to participate, but no allocation

[00hskrgrl]

I ran across a similar issue posted here where the allocation percentage was 0% for the first 3 years. My situations are a bit different in that eligibility for the allocation is service-based (in one case part-time vs. full-time; in the other 30 years of service to get allocation). I feel it's different enough to warrant a new topic posting.

In the first case, the employer would like to amend their plan to require full-time employment as a condition for receiving a matching contribution. Part-timers would still be eligible for the 401(k) plan and could make deferrals but would not receive a match, even if they worked over 1,000 hours. Full-time employees would be able to defer and get employer match, regardless of hours worked. The employer's thinking is that all employees are eligible for the 401(k) plan upon meeting the 1-year eligiblity requirement, so they satisfy the 410(a) minimum eligibility standards, and since the allocation formula doesn't require a certain number of hours worked, the rule about not requiring more than 1,000 hours for an allocation doesn't apply.

In the second case, the employer has a defined benefit plan and a defined contribution plan. The DB plan will stop accruals at 30 years of service (this is permitted by the IRS). The 401(k) plan is currently a deferral only plan, no employer contribution. The employer would like to amend the 401(k) plan to provide a profit sharing and match for employees who have completed 30 years of service and no longer have accruals in the defined benefit plan. Again, the employer's thinking is that since all employees are eligible to contribute to the 401(k) plan after 1 year of service, they have satisfied the minimum eligibility standards under 410(a), and since the 30-year requirement to receive an employer allocation is not tied to hours worked during the plan year, they're ok.

Assuming that coverage and nondiscrimination testing would be satisfied in both cases, my concern is with the IRS' definition of "plan" as it applies to IRC 410(a), and I'm unable to really find clear guidance whether "plan" refers to the plan as a whole or to each component plan that would normally be used for nondiscrimination testing. If it is the plan as a whole, then I might be inclined to agree with the employer's position that the minimum eligiblity standards are met, as icky as the prospect of a 30-year employment requirement to receive a matching contribution would be.

I'm also concerned about indirect service-based allocation requirements that exceed 1,000 hours, but am not able to find any clear cut guidance either way to provide to the employer. I have sought counsel, who was as befuddled as I about these inquiries.

I'm interested in what others in the community think about this. Especially in the first case, I find it difficult to imagine that the IRS would be satisfied with only allowing part-timers to defer and not ever being eligible to receive an employer allocation, even when they work over 1,000 hours and are there on the last day of the plan year (remember, neither of my plans has a 1,000 hour requirement or last day rule to share in employer allocation).

[ETA Consulting LLC]

In the first case, the employer would like to amend their plan to require full-time employment as a condition for receiving a matching contribution. Part-timers would still be eligible for the 401(k) plan and could make deferrals but would not receive a match, even if they worked over 1,000 hours. Full-time employees would be able to defer and get employer match, regardless of hours worked. The employer's thinking is that all employees are eligible for the 401(k) plan upon meeting the 1-year eligiblity requirement, so they satisfy the 410(a) minimum eligibility standards, and since the allocation formula doesn't require a certain number of hours worked, the rule about not requiring more than 1,000 hours for an allocation doesn't apply.

It's still a service class definition for eligibility. The eligibility applies to each source of contribution.

I'm also concerned about indirect service-based allocation requirements that exceed 1,000 hours, but am not able to find any clear cut guidance either way to provide to the employer.

I think you've found the appropriate guidance. It's providing an indirect method of eliminating the age and service requirements. In my opinion, which is often debated, this is the primary reason behind the IRS's rule stating the allocation groups "must be reasonable". It, basically, nulls and notion of age and service (and 1000 hour accrual requirements) when you can arbitrarily define and group to provide the allocation to; irrespective of these requirements.

It wouldn't surprise me if it were done, but I wouldn't do it.

Good Luck!

[00hskrgrl]

It wouldn't surprise me if it were done, but I wouldn't do it.

Good Luck!

Thanks! The other senior staff, legal counsel and I all agree - not something we would want to do, but not finding clear guidelines in this area and seeing the responses on the other question gave us pause. In the end, we are recommending against these amendments, and if the client is insistent, we will advise the clients of the risks and submit them separately for a determination letter.

[austin3515]

In the first case, the employer would like to amend their plan to require full-time employment as a condition for receiving a matching contribution. Part-timers would still be eligible for the 401(k) plan and could make deferrals but would not receive a match, even if they worked over 1,000 hours. Full-time employees would be able to defer and get employer match, regardless of hours worked. The employer's thinking is that all employees are eligible for the 401(k) plan upon meeting the 1-year eligiblity requirement, so they satisfy the 410(a) minimum eligibility standards, and since the allocation formula doesn't require a certain number of hours worked, the rule about not requiring more than 1,000 hours for an allocation doesn't apply.

If an eligible participant works more than 1,000 hours, they must receive the match unless they are excluded. And thou shalt not exclude based on a classification of part-time. Now, if you were able to exclude "paralegals" and this covered most of your bases, that is fine, unless you can't pass coverage with that exclusion. I think this is pretty basic pension law.

With respect to your DB question, I do know that you can test together and aggregate, but the finer points are beyond me!

[Kevin C]

Even if you are able to get a determination letter, I'm not sure how much good it would do. The 2001 version of Publication 794 had the following caution:

A determination letter may not be relied on with respect to whether a plan’s exclusion classifications, if any, violate the minimum age or service requirements of section 410 by indirectly imposing an impermissible age or service requirement.

That caution is not in the current version of the publication. I can't find anything about why it was removed. I did find a 2006 QAB that discusses the issue. The gist of it is that they felt the issue of indirect age or service requirements was best dealt with during examination instead of during a determination letter request. Anyone know if that has changed?

http://www.irs.gov/pub/irs-tege/qab_021406.pdf