Otherwise Excludable Employees / New Plan in Second Plan Year

[401QUE]

Here are the basic facts:

• Start up Plan effective 10/1/2012
• One employee that owns >5%, was hired 8/2/2012 (deferring 10%) - the only HCE for 2013
• No other employee owners
• No Employees had comp over $115,000 in 2012

If the 2013 ADP test is run using Otherwise Excludable method (using statutory entry date of 7/1/2012), are all employees excluded - even the HCE?

I cannot seem to find anything in Tripodi, or from the TPA (yet). Thank you!

[John Feldt ERPA CPC QPA]

All the employees are tested in the under 21/1 group. OEE allows you to test two smaller "plans". One being the over 21 and over 1 year group, the other being under 21 or under 1 year group.

Normally, only NHCEs end up in the under 21/1 group so it automatically passes. But that is not the case here - with the facts you have provided, they have an HCE so it must be tested.

[Tom Poje]

since it's the ADP test (and not coverage) there is an option to treat all HCEs as having met the requirements.

Relius calls it carve out when you 'carve out' just the NHCEs who don't meet the requirements.

It's Friday, John probably forgot about that testing option.

[John Feldt ERPA CPC QPA]

-sigh- Thanks Tom!

[BG5150]

Relius calls it carve out when you 'carve out' just the NHCEs who don't meet the requirements.

Just in time for Thanksgiving!

[John Feldt ERPA CPC QPA]

Okay, my penance will be to provide some citations:

I'll just point to the preamble to final 401(k) regulations:

A. General rules relating to the ADP test

...Section 401(k)(3)(F), as added by SBJPA, provides that a plan benefiting otherwise excludable employees and that, pursuant to section 410(b)(4)(B), is being treated as two separate plans for purposes of section 410(b), is permitted to disregard NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A). Thus, the regulations permit such a plan to perform the ADP test by comparing the ADP for all eligible HCEs for the plan year and the ADP of eligible NHCEs for the applicable year, disregarding all NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A). Because section 401(k)(3)(F) is permissive, the final regulations follow the proposed regulations and do not eliminate the existing testing option under which a plan benefiting otherwise excludable employees is disaggregated into separate plans where the ADP test is performed separately for all eligible employees who have completed the minimum age and service requirements of section 410(a)(1)(A) and for all eligible employees who have not completed the minimum age and service requirements.

Basically, a new plan of a new employer automatically passes. Other rare circumstances too. I hope that helps.