Naming Names

[Cloudy]

A corporation is starting a new plan. There are two 50% owners. One does not want to participate. Is there a problem with excluding that owner by name under the definition of Eligible Employee? (As opposed to finding a way to not name names.)

[Andy the Actuary]

In 1950, Hollywood director Edward Dmytryk named names before HUAC. This activity stalled his career. Do not name names. The IRS may stall your D-Letter. Better is to come up with a job category - e.g., exclude "Director of Advertising" or CFO.

[Belgarath]

Question - you don't specify if there are any common low employees who will participate? If this is a two-person only corporation, then they will both have to participate to satisfy 401(a)(26).

Since most DB plans being set up these days seem to be for very small businesses, I always ask this question.

[Cloudy]

There are other employees. It passes 401(a)(26).

[AndyH]

An issue with naming names is that it is not a reasonable classification for purposes of eligibility. This means that the plan must pass coverage by satisfying the ratio percentage test, as opposed to the average benefit test. Probably not a problem if an HCE/owner is excluded, but youneverknow.

[Cloudy]

Thank you AndyH I knew I remembered something like that. But, the 401(a)(4) rate groups can still pass based on the NCT%, correct?

[AndyH]

Correct

[BG5150]

If they aren't born in the same year:

Owner born before 19__ not eligible.

owner born after 19__ eligible.

If you get other owners in the future, just amend the plan.

[Effen]

I am not disagreeing with anything said so far. I agree that naming names is generally a bad idea. That said, I see it all the time, especially when describing benefits for HCEs. In general, I don't think the IRS cares so much about writing an HCE out of the plan.

A bigger problem that we have encountered in this situation is even though the other shareholder is excluded, his is still just as responsible for making sure the plan is properly funded. The plan is sponsored by the corporation, not the individual members of the corporation. We had a similar set up that worked great, until the shareholders had a falling out and the shareholder in the plan quit. The shareholder who was not in the plan was not to happy when he found out the corporation still had an obligation to fund the plan, especially when a large chunk of the required contribution went towards the ex-shareholders benefit.

Lots of potential problems with your solution. Make sure everyone has their eyes open before proceeding.

[masteff]

We fixed a problem once by including people using their unique company issued ID numbers.

[AndyH]

(In response to Effen's comment)

Good point. And there could be a deduction apportionment issue in the case of a partnership LLC, unless the partnership agreement specifically addresses this issue, as I understand it.

[Cloudy]

How would this situation be different if the owner that wants to be excluded were to waive participation in the plan rather than being excluded either by name or some other identifier in the plan document? Assume he could waive prior to the effective date of the plan, which would be his eligibility date.

[Rball4]

There is nothing that prohibits naming names in the plan document, but I try to avoid it whenever possible. Since this is just for an owner though, then it should not be a big deal to include the name in the doc. Also, how do you waive participation? You just amend the plan to freeze participation or to exclude this owner.

[John Feldt ERPA CPC QPA]

If you name names, then as said already, you are forced to pass 410(b) with the 70% ratio test. The other 410(b) coverage option is the average benefits percentage test which requires reasonable business classifications, and saying "Bob Jones is excluded" will not satsify the IRS as a reasonable business classification.

"The IRS may stall your D-Letter". Is this speaking from an actual case? We have seen D Letters stalled for "oops, we misfiled your application . . . oh, here it is . . . yeah, so, let's get that assigned to someone", but we have not seen naming names ever slow down a filing. Also, a while back one application received a request to provide a Schedule E and the investment alternatives for a cash balance plan, so that D letter request is taking some extra time.

I would avoid using age or something that indirectly refers to age as the identifier for excluding someone (like date of birth). Something about 410(a)? seems to gnaw at my memory there that a plan cannot apply an indirect age or service requirement to the plan other than age 21 and 1 YOS (with vesting) or age 21 and 2 YOS (with 100% vesting). For example, you can't say "all class A-type employees are excluded" if class A is solely defined in your company as employees with less than 5 years of service. FWIW.