401K Excluded Groups

[Guest DHouse]

We have two (2) types of employees, salaried and hourly. Our understanding is that we can exclude hourly employees as a group; i.e., only our salaried employees would be eligible to participate. However, we've read that there is a minimum coverage rule of some sort, and it's unclear if that applies to the creation of a salaried-only group. For example, do the total number of salaried employees have to equal or be greater than a certain percentage of the total number of employess working for us, before we can create this specific group. Please advise, if possible and/or direct us to the IRS provision governing this (we tried looking for it, but only found vague references on IRS.gov Thank you for your time, assistance and attention to this matter.

[Bill Presson]

We have two (2) types of employees, salaried and hourly. Our understanding is that we can exclude hourly employees as a group; i.e., only our salaried employees would be eligible to participate. However, we've read that there is a minimum coverage rule of some sort, and it's unclear if that applies to the creation of a salaried-only group. For example, do the total number of salaried employees have to equal or be greater than a certain percentage of the total number of employess working for us, before we can create this specific group. Please advise, if possible and/or direct us to the IRS provision governing this (we tried looking for it, but only found vague references on IRS.gov Thank you for your time, assistance and attention to this matter.

The coverage test you're referring to is in section 410(b). It's based on the number of Highly Compensated Employees covered compared to the number of Non-Highly Compensated Employees covered. The rule of thumb is that you have to cover 70% of the NHCEs, but it's a hard test to describe on a message board.

Assuming you have a competent TPA, they should be able to tell you how your census will impact what you want to do.

If you need something more specific, just sent me a private message.