Coverage, ADP testing, etc., when zero compensation

[Belgarath]

I know this has been discussed before, but sometimes viewpoints change, or sometimes the IRS says things from the podium that indicate a change in their approach.

So, for ADP testing and coverage testing, in the absence of known clear guidance, my own viewpoint is toss them out of the testing entirely. Should be the same for rate group testing as well. If you leave them in, it seems to unreasonably distort the results, either "for" the NHC or "against" them.

Same for participant count on 5500 forms? Seems like for consistency, you'd have to not count them here either.

Thoughts?

[Bird]

I agree that for testing, they get thrown out.

As far as the 5500 participant count, if they have satisfied eligibility and entered the plan, they are participants.

[Belgarath]

Thanks Bird. Yeah, as I was thinking about this last night, I came to the same conclusion you did on the 5500 forms.

[AlbanyConsultant]

What about the case where the partners/sole prop end up with negative (therefore zero) compensation on the K-1/Schedule C? If you drop them off the test, you're going to put any other HCEs in a tough position. I know, the IRS doesn't care about the HCEs...

[Tom Poje]

which is the problem when there is no clear guidelines. yes the IRS has 'suggested' not to count them because they couldn't defer.

but...

back in the old days, if you took a hardship you couldn't defer for 1 year. so if you took a hardship on 1/1, you would still count the person because the rules say ignore the suspension.

If because you hit the 415 limit because of other contributions, the regs say include the body.

arguably, someone who worked legitimate hours, but had no comp, can't defer because he hit the 415 limit - there would seem to be a legitimate reason for including such an individual.

[ETA Consulting LLC]

Except that documents, typically, aren't written to curtail deferrals at the 415 limit in the same manner as Employer Match and Profit Sharing.

Good Luck!