Early Participation and Otherwise Excludable

[Guest LLHarlow]

I have several clients who operate staffing firms and they offer short eligibility to entice workers who might have other employment options. One plan has an eligibility provision of three months of service (no hours required) and age 21 with entry on the first day of the month following attainment. We're getting beat up on the ADP and ACP tests and I want to apply Otherwise Excludable (a/k/a Early Participation) rules to test the "short service" partcipants separately. (We have no Otherwise Excludable HCEs.) If I'm allowed to apply a statutory requirement of one year and age 21, can I exclude people who have worked for the company for three years but never acheived 1,000 hours?

The intent of the Otherwise Excludable and Early Participation rules was to prevent employers who are generous with eligibility from being negatively impacted. I feel as though I should be allowed to exclude employees who work 20-100 hours per year but I cannot find a citation to support this anywhere.

Help?

[chc93]

I don't think you can do what you say. Once an employee meets the eligibility requirements and entry date provision, he is eligible to defer... forever while emiployed, no matter how many hours he worked in the year, so has to be in the test. I don't think 1000 hours worked in a plan year is a condition for testing (ADP, ACP, coverage, discrimination), even if you elect to test these participants separately.

[Tom Poje]

under 1.401(k)-2(a)(1)(iii) you have 2 options:
(iii) Special rule for early participation. If a cash or deferred arrangement provides that employees are eligible to participate before they have completed the minimum age and service requirements of section 410(a)(1)(A), and if the plan applies section 410(b)(4)(B) in determining whether the cash or deferred arrangement meets the requirements of section 410(b)(1), then in determining whether the arrangement meets the requirements under paragraph (a)(1) of this section, either—
(A) Pursuant to section 401(k)(3)(F), the ADP test is performed under the plan (determined without regard to disaggregation under § 1.410(b)-7©(3)), using 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); or
(B) Pursuant to § 1.401(k)-1(b)(4), the plan is disaggregated into separate plans and 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 of section 410(a)(1)(A).

item A is a special rule that says "Ignore otherwise excludable rule for HCEs"

minimum age and service requirements of section 410(a)(1)(A)
(a) Participation
(1) Minimum age and service conditions
(A) General rule
A trust shall not constitute a qualified trust under section 401 (a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates—
(i) the date on which the employee attains the age of 21; or
(ii) the date on which he completes 1 year of service.

so, did the people in question ever complete 1 year of service? If they never worked 1000 hours (generally a year of service is considered to be 1000 hours in a 12 month period) then they remain otherwise excludable. I would have thought most software programs would handle that. once the person complete 1000 hours he has a year of service. even if he goes back to under 1000 hours, he still has that year of service so he is never otherwise excludable again.

If you run your ADP test using the otherwise excludable option then you have to run coverage testing the same way.

[Guest LLHarlow]

These are employees who never work 1,000 hours in an anniversary year or a plan year. This plan was audited in 2012 and I succesfully represented to the Examiner that these "less than 1,000 hours ever" employees were Otherwise Excludable. We all know, however, that what one Examiner might accept could be contested by another. Further, at the time of that IRS examination, there were approximately one dozen employees that did not work 1,000 hours and the ADP test was passing handsomely. Now I have several dozen who do not complete 1,000 hours and the ADP test fails miserably.

We use Relius for testing and the data is properly entered, there are two tests being generated (the Non Excludable and the Otherwise Excludable) but the employees who have never worked over 1,000 hours are being placed in the Non Excludable Test (hence the ADP test failing miserably). Like so many things wih Relius, I cannot determine if we've simply made one bad selection in the testing request, eligiblity calculation or plan specifications or if Relius is intentionally including these employees because they've received a determination from the Service on this issue.

Insights are geniunely appreciated.

[Guest LLHarlow]

Update...update...update. Relius says they are excludable. We've set our plan specs wrong. (Time for re-training in Jacksonville, bummer. Not.)

[MWeddell]

Yes, the employees who never had a year of eligibility service (using the 1,000 hours method if that is how the plan document measures service) are in the < age 21 or < 1 YOS group that may be tested separately. There's also the rule that allows you to exclude just NHCEs from that group and include any HCEs in the ADP/ACP testing with the bulk of the workforce.