Part Time Employees

[Dougsbpc]

Suppose you have a small profit sharing plan with 10 participants. 5 are full time and 5 are part time (under 1,000 hrs).

The plan allows all employees to be eligible upon being hired. In the past, profit sharing contributions were provided to all employees (full and part time).

They now want to amend the plan to be a 401(k) plan and require 1 year of service of 1,000 hrs for all sources. They also want the plan to have a safe harbor match and only want to provide the safe harbor match from now on.

Since the 5 part time employees have never worked 1,000 hours, they would not have met the eligibility requirements for the new salary deferrals and safe harbor match.

I believe rev. ruling 2004-13 also indicates that a safe harbor match would make a plan exempt from the top heavy minimum as long as no employer contribution (other than the safe harbor match) is funded for the year. Also this determination is made on a year by year basis.

It appears that in this case, the part time employees will not be able to make salary deferrals, receive a safe harbor match or receive a 3% top heavy minimum.

Does anyone agree / disagree?

[Lou S.]

I seem to recall that eligibility is NOT a protected benefit and you are correct in you analysis.

Though as a practical matter it could be a potential PR nightmare to axe half the employees from the plan. Especially when you tell them, "by the way you aren't eligible for distributions either because you are still employed."

edit - In cases like this the employer often (but not always) grandfathers those who met the prior eligibility into the plan.

[ETA Consulting LLC]

I seem to recall that eligibility is NOT a protected benefit and you are correct in you analysis.

Correct!

[Tom Poje]

while it is true you could change the eligiibility requirements for all employees, there is no reason that such a change only apply to newly hired employees, thus permitting the 5 'part time' employees to continue to defer if they so desire.

[Guest GeerTom]

Why do they want to exclude these folks?

To reduce admin costs? That won't work until the plan can make distributions to reduce the number of accounts under the plan.

To reduce the match? If they're part-time, it may not be that burdensome. My experience is that part-timers don't contribute much because they (a) don't have as much, (b) see the earnings as "mad money" for a second wage earner, and/or © don't have a close enough connection to the business to be wholly trusting of the employer's plan. Can you do a pro forma model to see what the match would have been based on prior year actual contributions?

The reason may not affect the analysis, but it could easily affect the solution.

As a middle ground between covering and not covering the existing employees, consider a payroll withholding setup for IRA contributions. Tell them to pick an IRA and give the employer the information needed to deposit money. The employer then withholds on an after-tax basis and pays that over, and the employees adjust their withholding allowances.

Of course, you would need a user-friendly payroll system to do this effectively, and if the employer uses a service I doubt you can get it done at all. Not all systems are that friendly, so good luck.

Tom Geer

[Dougsbpc]

while it is true you could change the eligiibility requirements for all employees, there is no reason that such a change only apply to newly hired employees, thus permitting the 5 'part time' employees to continue to defer if they so desire.

Tom,

No employees have ever been able to defer as it was a profit sharing plan until now. If eligibility for salary deferrals was 1,000 hours, the 5 part time would never have met those requirements.

Not providing contributions to the part time is the employer's decision. It turns out that the part time employees would ordinarily be independent contractors (indeed even competitors of the employer). A few of the jobs they get are not possible with independent contractors, this is why some of them are on payroll and these are the part time employees.