HCE determination

[Guest ppapdx]

1/1 plan year, plan sponsor determining HCE status for the 2012 testing year (1/1/2012 to 12/31/2012), and they use the Top paid 20% definition.

To determine the 20%, they must look at their employees in 2011 - and rank them by compensation earned in 2011.

But I have a question on the service exclusion. §1.414(q)-1T Q-9 says that you can exclude "employees who have not completed 6 months of service by the end of such year". It goes on to say that service in the immediately preceding year must be added to service in the current year.

Is "such year" defined as the testing year or the lookback year?

If an employee is hired on 8/1/2011 and terminates on 5/31/2012, could they be excluded when determining the 20% for the 2012 testing year?

• If "such year" is defined as the lookback year, then yes - they can be excluded. They do not have 6 months of service by the end of 2011. "Such year" is defined as the lookback year - which is 2011.
• If "such year" is defined as the testing year, then no - they cannot be excluded. They have in excess of 6 months of service by the end of 2012 - because you have to add in their service from the preceding year (2011). "Such year" is defined as the testing year - which is 2012.

I know there is an example in the regulations - but it's not helping me at all.

And by the way - the Coverage & Nondiscrimination Answer Book defines this exclusion by saying:

The following employees may be excluded from a determination of the top-paid group:

• Employees who have not attained age 21 by the end of the plan year
• Employees who have not completed six months of service at the end of the plan year

When I think of "plan year", I think of the plan year being tested (2012). So that would lead me to believe the second bullet above in the example is correct. It would be nice if the regs & answer book used "determination year", "testing year", or "lookback year" - instead of "such year" and "plan year".

Any opinions?

[Belgarath]

I've always interpreted this as applying to the lookback year. In my tiny mind, this seems logical, since the top paid group election is testing the top 20% of employees for the LOOKBACK YEAR. Ergo, the 6-month exclusion is for whatever lookback year is being used. But, when you get to the next year, you have to look at total service to determine if the exclusion now applies for your new lookback year.

So in your example, you exclude for determination year 2012, because in lookback year 2011 employee didn't complete 6 months of service. When you move on to determination year 2013, you now don't exclude this person for lookback year 2012 under the 6-month exclusion, because he has more than 6 months of service when you combine 2011 and 2012.

I do think the regulation is poorly worded...

[Tom Poje]

in Q-9 (A) it says employees who have not completed 6 months of service by the end of the year.

so by the end of 2011 the person had only 5 moths of service and would be excluded.

but once the person works another month in 2012, I would hold they have met the 'service' requirement.

now that tosses you to another possibility

© Employees who normally work less than 6 months during any year

for example this would be someone who worked 5 months each year for 3 years, so they would have more than 6 months total service, but would appear to be excludable.

well that probably doesn't apply - that looks like it's for someone who always works lees than 6 months and happened to work one year at 7 months.

then there is, hopefully I have this correct

(f) 6 - month rule (gotta love this)

(1) it is based on the dreaded facts and circumstances

and it adds, if you work one day a month you are deemed to work that month.

(2) adds an example of a fisherman who worked 9 months in 1987 and 1988, then 8 months in 1989 then 5 months in 1990. you would still count him. (it considers 1990 an anomaly because the 5 months was due to weather conditions)

so, your facts and circumstances is "do you take into consideration the fact he terminated was the reason he had less than 6 months - or put another way, if he hadn't of quit, would he have worked more than 6 months'

or at least, that is how I would read it.

(I help edit that book, I didn't do that particular section, but I'll see about modifying that section a little. I'm the one who heavily bores you with all the different cross tested calculation examples)

[Guest ppapdx]

Thanks for the replies. That definitely helps. And Tom - saying the cross tested examples heavily bore me is putting it strongly. Maybe moderately