Open and shut eligibility for nonelective contribution

[7806akp]

Employer wants to make nonelective contributions on behalf of a certain group of employees to a profit sharing plan created solely for the purpose of receiving such contributions. Employer has determined that it would like to define eligible employees as those with 2 years of service (with immediate vesting) as of the effective date of the profit sharing plan, and the profit sharing plan will be closed to new entrants after the effective date of the plan. (Basically, although there is no intention to do so, the employer could achieve the same result by putting all the eligible individuals on an exhibit to the plan and defining eligible employees as those individuals listed on the exhibit.) There are HCEs and NHCEs in the group of employees, but the plan is expected to pass nondiscrimination and 410(b) coverage testing. Does this plan design cause problems under Code section 410(a) or otherwise? Could this design cause the plan to fail to be a "bona fide plan for the exclusive benefit of employees in general"?

[ETA Consulting LLC]

I know that the IRS has issue a rule disallowing "service class exclusions" where you place all part-time individuals in some arbitrary class (i.e. janitors) and then write the plan to exclude that class. I would use that rule to imply that you may not manipulate the plan terms in order to circumvent any of the minimum age and service requirements.

At the end of the day, it would be a measure of risk. The IRS "may" argue that based on the facts and circumstances, you manipulated plan provisions in order to circumvent maximum (minimum age and service rules).

Good Luck!